LECTURES  DELIVERED  BEFORE  THE  ASSOCIATION 

OF   THE  BAR    OF   THE    CITY  OF 

NEW  YORK,   1916 


SOME  LEGAL  PHASES   OF  COEPOEATE 

FINANCING,  EEOEGANIZATION 

AND  EEGULATION 


THE  MACMILLAN  COMPANY 

NEW  YORK  •    BOSTON  •   CHICAGO  •   DALLAS 
ATLANTA  •    SAN   FRANCISCO 

MACMILLAN  &  CO.,  LIMITED 

LONDON  •    BOMBAY  -    CALCUTTA 
MELBOURNE 

THE  MACMILLAN  CO.  OF  CANADA,  LTD. 

TORONTO  ' 


SOME  LEGAL  PHASES  OF  CORPORATE 

FINANCING,  REORGANIZATION 

AND  REGULATION 


BY 

FRANCIS  LYNDE   STETSON 

JAMES   BYRNE 

PAUL  D.   CRAVATH 

GEORGE  W.  WICKERSHAM 

GILBERT   H.   MONTAGUE 

GEORGE  S.   COLEMAN 

WILLIAM  D.   GUTHRIE 


THE   MACMILLAN   COMPANY 

1917 

All  rights  reserved 


COPTBIGHT,   1917, 

BT  THE  MACMILLAN  COMPANY. 


Set  up  and  electrotyped.    Published  March,  1917. 


Norton  ott 

J.  8.  Gushing  Co.  —  Berwick  &  Smith  Co. 
Norwood,  Mass.,  U.S.A. 


CONTENTS 

PAGE 

INTRODUCTORY  NOTE vii 

PREPARATION  OF  CORPORATE  BONDS,  MORTGAGES,  COLLATERAL 
TRUSTS,  AND  DEBENTURE  INDENTURES,  BY  FRANCIS  LYNDE 

STETSON       1 

FORECLOSURE  OF  RAILROAD  MORTGAGES,  BY  JAMES  BYRNE       .  77 

REORGANIZATION  OF  CORPORATIONS,  BY  PAUL  D.  CRAVATH       .  153 

THE  SHERMAN  ANTI-TRUST  LAW,  BY  GEORGE  W.  WICKERSHAM  235 
THE  FEDERAL  TRADE  COMMISSION  AND  THE  CLAYTON  ACT,  BY 

GILBERT  H.  MONTAGUE 275 

THE  PUBLIC  SERVICE  COMMISSIONS,  BY  GEORGE  S.  COLEMAN    .  327 

PUBLIC  SERVICE  COMMISSIONS,  BY  WILLIAM  D.  GUTHRIE   .        .  347 

INDEX 375 

CASES  CITED  OR  DISCUSSED     ....  379 


358852 


INTRODUCTORY   NOTE 

THE  addresses  of  which  this  volume  is  composed  were 
delivered  during  the  early  spring  of  1916,  at  the  instance 
of  the  Association  of  the  Bar  of  the  City  of  New  York,  to 
audiences  drawn  from  the  practicing  lawyers  of  New  York 
City.  They  excited  so  much  interest,  evidenced  not  only 
by  an  unexpectedly  large  attendance  but  by  repeated  and 
continuing  requests  for  copies  of  the  lectures,  that  the 
Executive  Committee  of  the  Association  has  felt  justified 
in  permitting  their  publication. 

In  the  autumn  of  1915,  the  Association  decided  to  offer, 
periodically,  a  series  of  law  lectures  by  especially  qualified 
lawyers  upon  some  particular  subject  or  upon  closely  related 
subjects  which  should,  in  such  degree  as  might  be  practi- 
cable, afford  the  general  practitioner  the  benefit  of  the  expe- 
rience and  practical  counsel  of  those  who  have  become  expert 
in  the  branch  of  law  under  discussion.  The  addresses  con- 
tained in  this  book  constitute  the  first  series  of  lectures  pre- 
sented in  execution  of  this  purpose.  The  reader  should 
understand  that  these  papers  were  not  intended  for  general 
reading  nor  even  for  the  instruction  of  law  students,  although, 
doubtless,  any  one  possessing  a  certain  amount  of  technical 
knowledge  may  find  in  them  much  that  will  prove  of  inter- 
est. They  were  not  designed  to  suggest  reforms  in  law  or 
in  judicial  procedure,  however  much  or  undeniably  such 
reforms  may  be  needed.  Nor  were  they  designed  to  set 
forth  in  any  comprehensive  way  the  body  even  of  the  very 
special  branch  of  the  law  with  which  they  are  concerned. 


Vili  INTRODUCTORY    NOTE 

They  were  intended  for  the  practical  guidance  of  practicing 
lawyers,  already  familiar  with  the  general  principles  and 
rules  of  practice,  in  accomplishing  specific  things  in  the  best 
and  most  efficacious  ways. 

The  task  of  supervising  the  legal  phases  of  the  work  of 
reorganizing  and  refinancing  great  corporate  enterprises  — 
whether  regenerated  by  complete  reorganization  or  merely 
reinvigorated  by  voluntary  recapitalization  —  is  performed 
by  a  relatively  small  number  of  lawyers.  Almost  every  such 
undertaking  requires  the  investment  of  new  capital,  which 
must  be  supplied  or  "underwritten"  in  advance;  for  in 
such  an  affair  the  consequences  of  failure  are  too  serious  and 
the  injuries  inflicted  too  nearly  permanent  to  justify  risking 
a  fiasco.  Moreover,  a  scheme  of  reorganization  or  of  financ- 
ing which  cannot  be  underwritten  in  advance  must,  almost 
certainly,  be  one  which  is  foredoomed.  The  dominant  figure, 
therefore,  in  every  such  undertaking,  is  that  of  the  banker 
and  the  guiding  spirit  is  the  banker's  lawyer.  Bankers  who 
are  qualified  by  wealth,  experience,  and  influence  to  under- 
take such  affairs  are  few  in  number;  in  direct  ratio,  the 
membership  of  what  may,  not  unappropriately,  be  denomi- 
nated "  the  financial  bar  "  is  also  limited.  There  are,  never- 
theless, numerous  instances  in  which  lawyers  habitually 
engaged  in  other  branches  of  practice  are  called  upon  to 
advise  clients  who  are  deeply  interested  in  corporate  reor- 
ganizations, and  occasionally  such  a  lawyer  finds  himself  in 
the  role  of  adviser  to  a  reorganization  committee,  a  syndicate 
of  underwriters,  or  a  mortgage  trustee.  However  well 
grounded  in  principle  or  familiar  with  precedent  he  may  be, 
however  competent  to  discover  by  an  expenditure  of  time 
and  labor  what  should  be  done  and  how  to  do  it,  any  such 
person  must  necessarily,  for  a  time  at  least,  be  at  a  loss  for 
that  practical  guidance  which  cannot  be  found  in  books  or 
decisions.  These  lectures  were  designed  to  serve  persons 
thus  situated  and,  as  well,  younger  members  of  the  profes- 
sion called  on  to  assist  more  experienced  lawyers  in  such 


INTRODUCTORY  NOTE  IX 

matters  or  ambitious  to  engage  in  practice  of  the  sort 
described. 

The  Lectures  on  the  Sherman  Anti-Trust  Law  and  the 
Clayton  Act  discuss  important  phases  of  the  law  of  inter- 
corporate relations  that  are  necessarily  involved  in  any 
present-day  consideration  of  the  financing  and  reorganization 
of  corporations. 

The  realization  of  the  plan  for  courses  of  lectures  of  which 
these  addresses  form  the  first  instalment  was  due,  in  great 
part,  to  the  zeal  and  unselfish  endeavor  of  the  late  Francis 
C.  Huntington,  the  Chairman  of  the  Special  Committee 
charged  with  the  execution  of  the  plan.  Mr.  Huntington's 
untimely  death  occurred  while  the  lectures  for  which  he 
had  arranged  were  in  process  of  delivery.  In  a  very  real 
sense  this  book  is,  by  the  very  circumstances  of  its  produc- 
tion, dedicated  to  the  memory  of  that  sweet-natured,  high- 
souled,  and  public-spirited  lawyer. 


SOME  LEGAL  PHASES  OF  COEPOEATE 

FINANCING,  EEOEGANIZATION, 

AND  EEGULATION 


PREPARATION  OF  CORPORATE  BONDS,  MORT- 
GAGES, COLLATERAL  TRUSTS  AND  DEBENTURE 
INDENTURES 

Papers  read  February  9  and  February  16,  1916,  before  The  Association  of  the 
Bar  of  the  City  of  New  York  by  Francis  Lynde  Stetson l 

THE  papers  to  be  presented  by  me  in  the  present  series  are 
intended  not  as  treatises,  but  rather  for  practical  guidance  in 
the  preparation  and  examination  of  corporate  bonds  and  mort- 
gages, collateral  trusts  and  debenture  indentures.  They  are 
related  to  and  arise  out  of  the  activities  of  corporations 
organized  for  the  transaction  of  business,  usually  the  business 
of  transportation.  This  evening,  after  a  general  introduction, 
the  paper  will  deal  only  with  the  subject  of  corporate  bonds 
and  mortgages  and  deeds  of  trust,  strictly  so  called,  the  con- 
sideration of  collateral  trusts  and  debentures  having  been  as- 
signed to  the  evening  of  February  16th. 

The  Historical  Development  of  the  Corporate  Bond  and  Mortgage 

The  conditions  and  objects  of  the  law  concerning  corporate 
bonds  and  mortgages  may  be  presented  conveniently  as  the 

1  At  the  very  outset  it  is  proper  that  I  should  state  that  except  for  the  prom- 
ised and  abundant  cooperation  of  my  friend  and  associate  Mr.  George  H. 
Gardiner  I  should  have  been  unable  to  accept  the  invitation  to  read  before  this 
Association  the  papers  to  which  without  reserve  he  has  contributed  from  bis 
large  experience. 

B  1 


2      PREPARATION   OF  CORPORATE  BONDS,  MORTGAGES 

same  has  been  developed  in  connection  with  railroad  corpora- 
tions, particularly  as  created  or  regulated  by  the  statutes  of 
our  own  state,  to  which  your  attention  is  first  invited. 

It  is  difficult  to  realize  that  less  than  a  century  has  elapsed 
since  the  enactment  of  the  first  railroad  charter  in  this  State, 
viz.,  that  of  the  Mohawk  &  Hudson  Railroad  Company,  incor- 
porated April  17,  1826,1  to  construct  and  operate  a  railroad 
eighteen  miles  long  from  Albany  to  Schenectady.  This  charter 
authorized  a  capital  stock  not  exceeding  $500,000,  and  reserved 
to  the  state  the  right  within  five  years  from  completion  to  take 
over  the  railroad  at  cost  and  interest.  An  expenditure  in  excess 
of  the  authorized  capital  could  hardly  have  been  anticipated, 
for  the  act  contained  no  grant  of  power  to  mortgage.  But,  as 
has  been  usual  in  later  experience,  the  original  estimate  of  cost 
proved  inadequate;  and  eight  years  later  acts  were  passed 
increasing  the  stock,  and  authorizing  a  mortgage  for  not  more 
than  $250,000,  and  also  the  conversion  of  the  loan  into  stock 
at  par  within  two  years  after  the  passage  of  the  act.  This 
chapter  39  of  1834  is  the  earliest  New  York  act  in  which  I  have 
found  provisions  expressly  authorizing  a  railroad  mortgage  or 
the  conversion  of  a  loan  into  stock ;  but  in  the  next  decade  the 
charter  of  the  Hudson  River  Railroad  Company,  enacted 
May  12,  1846,2  gave  such  powers  more  freely  and  with  much 
elaboration,  subject,  however,  to  the  limitations  that  the 
$2,000,000  mortgage  thereby  authorized  should  not  cover  the 
personal  property,  should  always  be  $500,000  less  than  the 
paid-up  capital  stock,  and  that  the  whole  capital  represented 
by  the  stock  and  the  bonds  should  not  exceed  $6,000,000. 

Just  before  this  time  Mr.  Charles  O'Conor  had  been  arguing 
before  Vice-Chancellor  Sandford,  with  boldness  and  great  sub- 
tlety, but  unsuccessfully,  that  such  a  limitation  upon  capital 
constituted  a  limitation  also  upon  the  total  amount  of  property 
that  a  corporation  might  own,  and  that  bonds  issued  in  payment 
for  property,  thereby  exceeding  that  amount,  were  void  and 

1  Laws  of  N.  Y.  1826,  Chap.  253.  2  Ibid.  1846,  Chap.  216. 


COLLATERAL  TRUSTS  AND  DEBENTURE  INDENTURES  3 

unenforcible ;  in  other  words,  that  the  power  to  borrow  money 
and  to  acquire  property  must  be  construed  as  being  confined 
within  the  limits  of  the  total  authorized  capital  of  the  corpora- 
tion. Had  the  courts  sustained  Mr.  O'Conor  in  his  contention 
in  February,  1844,  in  the  case  of  Barry  v.  Merchants'  Exchange 
Company,1  the  history  of  corporate  enterprise  in  this  State 
would  have  been  very  different  from  what  it  has  been,  unless, 
as  the  exigencies  of  events  would  have  required,  relief  had  been 
obtained  from  the  legislature.  The  importance  of  this  decision 
of  Vice-Chancellor  Sandford,  as  the  first  adjudication  in  this 
State  of  the  right  of  a  corporation  to  borrow,  even  in  the  absence 
of  express  statutory  authority,  was  considered  later  at  length 
in  the  luminous  and  eloquent  opinion  of  Judge  Comstock  in  the 
great  case  of  Curtis  v.  Leavitt.2  The  conclusion  was  there 
reached  "that  corporations,  along  with  their  specific"  powers, 
take  all  the  reasonable  means  of  execution,  all  that  are  "  adapted 
to  the  end  in  view,"  and  that  it  is  within  the  power  of  corpo- 
rations generally  to  issue  bonds  or  notes  when  no  prohibitory  or 
restraining  statute  is  violated  and  the  purpose  or  occasion  of 
making  them  is  lawful.  The  establishment  of  these  principles, 
almost  platitudinous  now,  involved  at  the  outset  battles  royal 
between  the  keenest  intellects  of  this  bar,  Beardsley,  Bidwell, 
Bronson,  B.  F.  Butler,  Cutting,  Duer,  Hill,  William  Kent,  Lord, 
Noyes,  and  O'Conor. 

But  the  adjudicated  power  to  issue  bonds  or  notes  did  not, 
without  express  authority,  carry  the  power  also  to  secure  the 
same  by  lien  or  mortgage  upon  the  public  franchises  of  the  cor- 
poration,3 nor  were  such  franchises  ordinarily  subject  to  seizure 
and  sale  under  execution.4  This  necessary  power  to  mortgage 
was  granted  by  the  legislature  of  New  York  with  great  hesitation 
and  many  limitations,  by  special  acts  from  time  to  time  up  to 

1  1  Sandf .  Ch.  (N.  Y.)  280-312 ;   1844. 
1  15  N.  Y.  1,51-62;    1857. 

3  Carpenter  v.  Black  Hawk  Gold  Mining  Co.,  65  N.  Y.  43-50 ;  1875.      Snell  v. 
Chicago,  152  U.  S.  191-199 ;   1893. 

4  Gue  v.  Tide  Water  Canal  Co.,  24  How.  (U.  S.)  257-263;   1860. 


4      PREPARATION  OF  CORPORATE  BONDS,  MORTGAGES 

April  2, 1850,  when  by  the  great  general  railroad  law  of  that  year 
(Chapter  140)  /  which  with  some  enlargements  is  substantially 
our  present  law,  there  was  granted  to  railroad  companies  gen- 
erally power  "to  mortgage  their  corporate  property  and  fran- 
chises to  secure  the  payment  of  any  debt  contracted  by  the 
company"  for  completing,  finishing  or  operating  their  railroad, 
with  the  right  to  confer  on  the  holders  of  bonds  the  right  to 
convert  the  principal  due  or  owing  thereon  into  stock  of  the 
company.  Now  the  mortgaging  power  has  been  granted 
throughout  the  United  States,  by  statutes  which  vary  so  widely 
and  contain  so  many  special  restrictions,  that  no  one  should 
address  himself  to  the  preparation  or  approval  of  a  mortgage 
upon  any  railroad  without  first  studying  carefully  the  pertinent 
provisions  of  law  in  every  state  through  which  the  railroad  runs. 
Tedious  and  even  meticulous  examination  beforehand  of  the 
constitution  and  the  statutes,  both  general  and  special,  of  the 
several  states  in  question,  may  be  rewarded  by  relief  from  that 
particular  form  of  subsequent  misery  which  Tom  Moore  de- 
clared to  be  Hell,  that  is,  "truth  known  too  late." 

From  this  summary  indication  of  the  fundamental  legal  re- 
quirements for  a  valid  corporate  mortgage  or  deed  of  trust  we 
may  proceed  to  a  consideration  of  such  instruments  and  of  the 
bonds  or  debentures  supposed  to  be  secured  by  such  instru- 
ments. 

In  the  year  1825  occurred  two  events  of  momentous  im- 
portance in  the  subsequent  history  of  the  world  and  of  cor- 
porate obligations — the  opening  of  George  Stephenson's  rail- 
road from  Darlington  to  Stockton-on-Tees  and  of  De  Witt  Clin- 
ton's canal  from  Lake  Erie  to  the  Hudson  River.  Immediately, 
throughout  our  Atlantic  States,  there  developed  an  excited  and 
even  frenzied  demand  both  for  canals  and  for  railroads.  In 
New  York  the  demand,  as  in  the  case  of  the  Mohawk  &  Hud- 
son and  its  later  connections  west  to  Buffalo,  was  for  competi- 
tion with  the  canal,  and  as  in  the  case  of  the  New  York  and 

i  Laws  of  N.  Y.  1850,  Chap.  140. 


COLLATERAL  TRUSTS  AND  DEBENTURE  INDENTURES  5 

Erie  Railroad,  chartered  April  24th,  1832,1  to  run  through  the 
southern  tier  of  counties,  as  compensation  to  them  for  the 
State's  canal  construction  through  central  New  York.2  Char- 
ters almost  without  number  were  followed  by  preliminary  sur- 
veys, resulting  in  disappointments  or  disasters.  Scheme  fol- 
lowed scheme  defiant  of  natural  conditions  or  sound  finance, 
and  bubbles  burst  in  bankruptcies,  until  appeals  for  aid,  be- 
yond the  inadequate  returns  from  issues  of  unsecured  capital 
stock,  were  pressed  most  urgently  upon  the  State  and  upon 
the  general  public.  In  1834,  the  Baltimore  &  Ohio  Railroad 
Company  obtained  from  the  State  of  Maryland  considerable 
loans,  for  the  repayment  of  which  it  gave  back  a  mortgage 
upon  its  railroad,  following  the  example  of  the  New  York  and 
Lake  Erie  Railroad  ^Company,  which,  in  1833,  by  mortgaging  its 
railroad  to  the  State  of  New  York,  obtained  for  certain  of  its 
stock  the  guaranty  of  the  State. 

But  in  each  case  the  aid  thus  obtained  proved  inadequate, 
and  then  came  into  operation  the  American  form  of  corporate 
bonds  secured  by  mortgage  upon  the  railroad  property  and 
franchises,  involving  foreclosure  and  sale  in  case  of  default, 
after  the  familiar  form  of  a  mortgage  on  real  estate.  The  first 
of  such  mortgages  was  that  of  the  Baltimore  &  Ohio  Railroad 
in  1846,  and  the  next,  that  of  the  New  York  and  Erie  Railroad 
dated  July  1,  1847,  to  secure  $3,000,000  bonds  of  which  there 

1  The  expectations  centering  upon  the  New  York  and  Erie  Railroad  were 
thus  stated  in  the  first  number  of  the  American  Railroad  Journal,  published 
January  2,  1832:    "With  such  a  Railroad  intersected  at  convenient  distances 
by  other  railroads  running  from  the  Erie  Canal  and  one  from  Ogdensburgh  to 
Syracuse  or  Utica  almost  every  county  in  the  State  would  be  brought  within 
twenty-four  hours  of  New  York.     It  would  prevent  a  recurrence  of  the  state 
of  things  which  now  exists  in  this  city.     There  would  not  then  be,  as  there  now 
is,  thousands  of  barrels  of  flour  and  other  kinds  of  produce  in  proportion  frozen 
up  in  canal  boats,  and  in  sloops  on  the  Hudson ;   salt  would  not  be  now  selling 
in  Albany  for  two  dollars  and  fifty  cents  per  bushel,  and  pork  at  two  dollars 
per  hundred  for  want  of  salt  to  save  it,  while  in  this  city  it  is  worth  from  five 
to  seven  dollars.     Coal  would  not  sell  here  for  fifteen  or  sixteen  dollars  per 
ton,  ...  as  has  been  the  case  for  two  or  three  weeks  past,  if  railroads  were  in 
general  use." 

2  Laws  of  N.  Y.  1832,  Chap.  224. 


6      PREPARATION  OF  CORPORATE  BONDS,  MORTGAGES 

are  still  outstanding  $2,482,000,  the  time  of  payment  having 
been  extended  to  1937.  This  form  of  mortgage  upon  railroad 
property,  involving  a  foreclosure  sale  in  case  of  default,  is  not 
available  to  railroad  corporations  in  England.  The  borrowings 
of  English  railroads  are  upon  promissory  obligations  somewhat 
similar  to  our  corporate  bonds,  but  which  constitute  merely  a 
charge  upon  "the  undertaking,"  or,  in  other  words,  upon  the 
income  of  the  property  enforcible  through  the  appointment  of  a 
receiver.1  Such  obligations  are  given  the  general  term  "  deben- 
tures." Sir  Francis  Palmer  in  his  "Company  Precedents," 
traces  the  term  "debentures"  from  very  early  times,  and  con- 
cludes that  the  word  admittedly  has  no  technical  significance, 
but  that  its  meaning  is  to  be  determined  by  the  popular  sense 
in  which  it  is  used.  In  England,  according  to  Palmer,  the  term 
"debenture"  seems  to  comprehend  all  serial  obligations  of  the 
corporation,  whether  or  not  secured  by  a  charge,  and  whether 
or  not  issued  under  a  trust  deed,  those  issued  under  a  trust  deed 
being  generally  styled  debenture  stock.  In  this  country,  the 
term  "  debentures "  has  come  to  mean  any  class  of  serial  obliga- 
tions of  a  corporation  not  secured  by  a  specific  lien  upon  property. 

From  the  very  beginning,  and  still  continuing,  the  form  of 
the  corporate  serial  obligation  and  of  the  mortgage  or  other 
instrument  pursuant  to  which  such  obligations  are  issued,  has 
been  undergoing  enlargement  because  of  the  development  of 
new  requirements  by  investors.  The  condition  corresponds  to 
that  which  originally  produced  the  idea  of  the  corporate  bond 
and  mortgage,  namely,  the  urgent  demand  for  capital  for  cor- 
porate enterprise,  and  the  necessity  of  offering  to  the  public  a 
form  of  security  which  will  satisfy  as  well  as  attract  purchasers 
of  corporate  bonds. 

The  mortgage  of  the  Baltimore  &  Ohio,  made  in  October, 
1846,  to  the  President  of  the  Company  and  his  successors  as 

1  The  English  and  Canadian  procedure  "takes  the  place  .  .  .  of  foreclosure 
sales  in  the  United  States,  which  in  general  accomplish  substantially  the  same 
result  with  more  expense  and  greater  delay."  —  WAITE,  C.  J.,  Canada  Southern 
Railway  Co.  v.  Gebhard,  109  U.  S.  527,  539 ;  1883. 


COLLATERAL  TRUSTS  AND  DEBENTURE  INDENTURES  7 

Trustees,  is  interesting,  in  that  it  recites  that  the  Company  has 
issued  "certificates  of  debt  in  which  was  contained  the  pledge 
of  the  property  and  funds  and  stock "  of  the  Company,  and 
that  "it  has  been  suggested  that  the  security  intended  to  be 
given  by  the  Company  to  the  holders  of  said  certificates,  and 
their  assigns,  would  be  to  them  more  satisfactorily  expressed  if 
there  was  executed  by  the  said  Company  an  instrument  of 
writing  which  being  duly  acknowledged  might  be  recorded  as 
deeds  and  mortgages  are  recorded,"  and  thereupon  proceeds  to 
grant  in  trust  for  the  holders  of  said  certificates  the  property 
and  funds  of  the  Company  comprehended  in  the  authority  of 
the  statute  governing  the  Company.  Except  as  to  the  recitals, 
the  mortgage  instrument  is  substantially  an  ordinary  real  estate 
mortgage  without  covenants.  The  Baltimore  &  Ohio  issued  also 
various  mortgages,  including  a  sterling  mortgage  running  to  Bar- 
ing &  Company  of  London,  in  1850,  and  three  later  mortgages 
in  1850  and  1853  to  the  President  of  the  Company  as  trustee. 

In  1850  and  later,  various  railroads  in  the  South  were  mort- 
gaged by  statute  to  secure  advances  made  to  them  by  the  in- 
corporating State,  among  which  may  be  mentioned  the  First 
Mortgage  of  the  Richmond  and  Danville  Railroad  to  the  Com- 
monwealth of  Virginia,  made  in  1850  to  indemnify  the  State 
against  its  indorsement  of  $200,000  six  per  cent  bonds  of  the 
Railroad  Company;  the  Second  Mortgage  of  the  same  com- 
pany to  the  Board  of  Public  Works  of  Virginia  to  secure  a  loan 
by  the  State  of  $600,000;  a  lien  upon  the  Laurens  railroad 
created  by  the  South  Carolina  statute  of  1859;  and  various 
liens  upon  other  roads  under  the  Internal  Improvement  Laws 
of  Tennessee  and  other  states  in  1853  and  1854. 

In  tracing  the  development  of  the  corporate  mortgage  from  the 
statutory  lien  phase  it  may  be  advantageous  now  to  resume  and 
continue  consideration  of  the  story  of  the  funded  debts  of  the  New 
York  and  Erie  Railroad  and  its  successors.  For  a  long  period 
the  managers  of  that  corporation  were  the  pioneers  in  the  gradual 
expansion  of  the  corporate  mortgage  from  a  simple  real  estate 


8      PREPARATION  OF  CORPORATE  BONDS,  MORTGAGES 

lien  to  the  complex  agreements  which  have  become  necessary  to 
meet  the  increasingly  exacting  demands  of  the  investing  public. 

The  Baltimore  &  Ohio  mortgages  are  of  less  interest  than 
the  Erie  mortgages,  inasmuch  as  the  modern  form  of  instru- 
ment indicates  a  development  of  the  Erie  mortgages  rather 
than  of  the  Baltimore  &  Ohio  form.1 

Next  succeeding  the  New  York  and  Erie  bonds  of  July  1, 
1847,  secured  by  the  State  lien  of  1845,  came  the  Company's 
so-called  "second  mortgage,"  being  its  first  deed  of  trust, 
dated  March  1, 1849,  to  John  J.  Palmer  and  others  as  Trustees. 
This  mortgage  granted  to  the  trustees  of  the  railroad  all  the 
appurtenances  of  the  Company  "now  owned  ...  or  which 
shall  hereafter  be  owned,"  but  subject  to  the  $3,000,000  lien 
of  the  statute  of  1845.  It  will  be  observed  that,  even  at  this 
early  date,  there  was  recognized  the  necessity  of  obtaining  a 
lien  on  the  corporate  enterprise  as  a  whole,  by  providing  that 
after-acquired  property  should  be  included.  The  debt  to  be 
secured  by  the  mortgage  was  $4,000,000,  evidenced  by  7  per 
cent  bonds,  each  of  one  thousand  dollars. 

The  bonds  in  terms  acknowledge  the  company  to  be  in- 
debted to  "John  J.  Palmer  or  bearer  in  the  sum  of  $1,000, 
lawful  money  of  the  United  States,  which  sum  they  promise  to 
pay  to  the  said  John  J.  Palmer  or  bearer,"  and  provided  for  the 
payment  of  the  interest  semi-annually  "on  presentation  and 
delivery  of  the  annexed  dividend  warrants."  The  bond  then 
proceeds  to  recite  that  it  is  one  of  the  series  issued  for  the  ex- 
tension of  the  railroad,  and  that  the  holder  is  entitled  to  the 
security  of  the  described  mortgage.  It  is  of  interest  to  note 
also  that  a  stock  conversion  privilege  is  included  as  follows: 

"The  holder  of  this  bond  shall  be  entitled  at  any  time  before  the 
first  day  of  March,  1859,  to  convert  the  principal  sum  into  the  capital 
stock  of  the  Company  at  par,  on  surrendering  the  bond  with  the  war- 
wants  not  then  due  annexed." 

1  The  Erie  Railroad  Company  and  its  predecessors  and  subsidiaries  have  issued 
twenty-seven  mortgages  now  outstanding,  of  which  eight  cover  the  main  line. 


COLLATERAL  TRUSTS  AND  DEBENTURE  INDENTURES     9 

The  mortgage  instrument  contains  about  twenty  folios.  It 
recites  briefly  the  corporate  authority  of  the  mortgagor,  and 
the  purpose  of  the  deed,  sets  forth  the  form  of  the  bonds  in 
full,  grants  the  mortgaged  property  in  trust  to  the  trustees 
subject  to  the  prior  state  statutory  lien,  contains  a  covenant  of 
further  assurance,  and  provides  that  in  case  of  default  it  shall 
and  may  be  lawful  for  the  trustees  "  upon  the  request  in  writ- 
ing of  any  one  of  the  holders  of  the  bonds  on  which  interest 
or  principal  is  not  fully  paid,"  to  enter  upon  and  take  posses- 
sion of  the  property  and  to  sell  the  same,  and  as  attorneys  of 
the  mortgagor  to  execute  conveyance  to  the  purchaser,  and  to 
apply  the  proceeds  of  sale  to  the  payment  of  costs,  the  satis- 
faction of  the  mortgage  debt  and  the  rendering  of  the  surplus 
to  the  mortgagor  or  assigns.  The  mortgage  contains  also  a 
provision  for  the  filling  of  vacancies  among  the  trustees.  This 
mortgage  was  drafted  probably  by  Judge  William  Kent,  then 
the  counsel  of  the  railroad,  son  of  Chancellor  Kent,  and  himself 
of  high  authority  as  a  lawyer,  conveyancer  and  judge. 

Upon  March  1,  1853,  the  New  York  and  Erie  Railroad  Com- 
pany executed  its  so-called  "third  mortgage"  to  James  Brown 
and  John  Davis,  as  Trustees.  This  third  mortgage  provides 
for  the  issue  of  $10,000,000  bonds,  of  which  $4,000,000  were  to 
provide  for  the  payment  of  an  equal  amount  of  bonds  secured 
by  the  former  mortgage  of  1849.  This  seems  to  have  been 
the  inception  of  the  refunding  mortgage. 

The  bond  is  substantially  in  the  form  of  the  pioneer  of  1849, 
but  there  appears  on  the  margin  the  following; 

"New  York  and  Erie  Railroad  Company 
Mortgage  Bond  No.  $1000. 

This  is  to  certify  that  the  within  bond  is  included  in  a  mortgage  on 
the  entire  property  of  the  New  York  and  Erie  Railroad  Company, 
duly  executed  to  James  Brown  and  John  Davis,  Trustees,  and  dated 
March  1,  1853." 

While  the  signature  of  the  trustees  does  not  appear  to  have 
been  required,  this  is  clearly  the  origin  of  the  certificate  of 


10     PREPARATION  OF  CORPORATE  BONDS,  MORTGAGES 

authentication  which  invariably  is  placed  upon  bonds  of  the 
present  day  and  is  signed  by  the  trustee. 

The  mortgage  itself  follows  generally  the  form  of  the  last 
preceding  mortgage. 

The  so-called  "fourth  mortgage"  of  New  York  and  Erie 
Railroad  Company,  dated  August  15,  1857,  was  executed  to 
James  Brown  and  John  C.  Bancroft  Davis,  as  Trustees. 

The  bond  follows  the  form  of  the  early  bond,  except  that  it 
contains  a  provision  that  in  case  of  six  months'  default  in  the 
payment  of  any  of  the  interest  warrants  "on  the  bonds  of  this 
issue  .  .  .  then  the  principal  of  the  said  bonds  shall  be  due 
and  payable."  It  provides  also  for  the  countersignature  of  the 
trustees  at  the  foot  of  the  bond. 

The  mortgage  covers  not  only  the  railroad  of  the  company, 
but  also  the  rights  of  the  company  under  leases  of  other  rail- 
roads. It  repeats  the  provision  in  the  bonds  about  the  accelera- 
tion of  the  maturity  of  the  principal  in  case  of  default  and  con- 
tains also  provisions  setting  forth  the  immunities  of  the  trustees. 
In  text  this  mortgage  is  about  twice  the  length  of  the  original 
mortgage  of  1849. 

The  so-called  fifth  Erie  mortgage,  dated  June  1,  1858,  indi- 
cates no  further  development  in  form,  but  it  provides  for  the 
issue  of  bonds  of  $500  each  as  well  as  bonds  of  $1000. 

Subsequently  to  the  fifth  mortgage  and  in  September,  1865, 
the  Erie  Railway  Company,  the  successor  of  the  New  York 
and  Erie  Railroad  Company,  issued  a  series  of  convertible  un- 
secured bonds  for  the  principal  amount  of  £1,000,000  which 
had  no  lien  upon  the  property  of  the  Company. 

Then  there  appears  the  first  mortgage  of  the  Company  to  a 
corporate  trustee,  the  First  Consolidated  Mortgage  of  1870 
from  the  Erie  Railway  Company  to  the  Farmers  Loan  and 
Trust  Company.  The  mortgage  instrument  is  similar  to  the 
preceding  one,  but  the  bonds  contain  three  features  appearing 
for  the  first  time.  The  first  is  a  promise  to  pay,  at  the  option 
of  the  holder,  in  sterling  money  at  a  fixed  rate  of  exchange  in- 


COLLATERAL  TRUSTS  AND  DEBENTURE  INDENTURES  11 

stead  of  in  United  States  gold  coin.  The  second  is  the  provi- 
sion for  the  registration  of  the  principal  sum.  The  third  is  the 
recital  that  "this  bond  shall  not  become  obligatory  until  au- 
thenticated by  a  certificate  endorsed  hereon  signed  by  the  said 
Trustee,"  which  certificate  in  terms  declared  that  the  bond  is 
one  of  the  bonds  secured  by  the  mortgage  and  that  the  mort- 
gage was  duly  recorded. 

In  1874  the  same  company  issued  its  Second  Consolidated 
Mortgage.  This  mortgage  secured  not  only  $30,000,000  of 
bonds  issuable  thereunder,  but  also  $10,000,000  of  convertible 
bonds  issued  two  years  previously.  Such  provision  for  secur- 
ing equally  with  the  mortgage  bonds  a  prior  unsecured  debt 
was  a  new  feature  in  such  an  instrument;  and  the  bond  con- 
tains a  provision,  then  novel,  reserving  to  the  company  the 
right  to  redeem  the  bond  before  maturity. 

Generally,  the  earliest  mortgages  ran  to  a  single  individual 
as  trustee,  although  in  the  case  of  the  New  York  and  Erie 
Railroad  Company  from  the  beginning  there  were  two  or  more 
individual  trustees.  Subsequently  it  became  the  general  prac- 
tice to  name  two  or  three  individuals  as  trustees.  Still  later, 
the  individual  trustee  was  superseded  customarily  by  a  corporate 
trustee,  and  in  recent  years,  to  meet  the  requirements  of  State 
statutes  calling  for  a  resident  trustee,  a  natural  person  and 
citizen  of  the  State  oftentimes  is  joined  with  a  corporate  trustee, 
to  which,  however,  is  assigned  exclusively  all  active  duties  prior 
to  default. 

In  the  earliest  mortgages,  the  trust  estate  was  the  real 
property,  appurtenances  and  equipment  of  the  mortgagor; 
then  leaseholds  were  added,  and  still  later  security  interests  in 
other  companies.  Such  security  interests  were  assigned  in 
terms  and  without  delivery  to  the  trustee  of  the  stock  and  bonds 
themselves ;  in  other  words,  by  way  of  mortgage  rather  than 
pledge.1  As  an  illustration,  in  the  New  York,  Lake  Erie  & 

1  Wilson  v.  Little,  2  N.  Y.  443;  1850.  Story  on  Bailments,  Sections  290- 
297  ;  9th  Ed.,  1878. 


12     PREPARATION  OF  CORPORATE  BONDS,  MORTGAGES 

Western  Second  Consolidated  Mortgage  bonds  of  1878,  the 
assignment  is  of  "  all  the  estate,  right,  title  and  interest  of  the 
party  of  the  first  part  in  the  following  corporations  ...  in- 
tending hereby  to  convey  ...  all  and  every  right,  title  and 
interest  of  the  party  of  the  first  part  .  .  .  whether  as  lessee  or 
as  holder  of  stock  or  bonds  of  the  corporations,  associations  and 
organizations.  ..." 

A  later  development  in  this  direction  was  the  deposit  of  the 
corporate  securities  with  the  trustee,  thus  effecting  a  perfect 
pledge  of  the  property  so  delivered.  In  some  instances,  such 
a  pledge  of  corporate  securities  was  made  in  addition  to  and  as 
part  of  a  mortgage  on  the  railroad  property,  and,  in  other  in- 
stances, the  pledged  property  constituted  the  sole  trust  estate. 
An  early  instance  of  a  pledge  as  sole  security  was  a  mortgage 
of  the  New  York,  Lake  Erie  &  Western  Railroad  Company  of 
October  1,  1885,  to  secure  its  funded  coupon  bonds,  the  security 
being  the  pledge  with  the  trustee  of  coupons  appertaining  to 
bonds  secured  by  certain  prior  mortgages.  Except  for  such 
mortgage  lien,  the  promises  of  the  obligor  could  not  be  regarded 
as  constituting  collateral  security  for  its  subsequent  promises. 

Other  early  examples  of  indentures  under  which  the  security 
was  solely  corporate  bonds  and  stocks,  are  the  two  indentures 
of  the  Richmond  &  West  Point  Terminal  Railway  and  Ware- 
house Company,  one  dated  February  1,  1887,  and  the  other 
dated  March  1,  1889,  each  securing  bonds  by  the  pledge  with 
a  trust  company  of  a  number  of  parcels  of  different  corporate 
bonds  and  stocks.  There  may  be  mentioned  also  a  collateral 
trust  mortgage  of  the  Georgia  Company  made  in  1888,  secur- 
ing bonds  by  the  pledge  with  a  trust  company  of  stock  of  the 
old  Central  Railroad  &  Banking  Company  of  Georgia,  and 
nothing  else. 

A  prominent  instance  of  a  mortgage  creating  a  lien  on  real 
property  and  a  pledge  of  corporate  securities,  was  the  Consoli- 
dated Mortgage  of  the  Northern  Pacific  Railway  Company  of 
1889,  wherein  provision  was  made  for  delivery  to  the  trustee 


COLLATERAL  TRUSTS  AND  DEBENTURE  INDENTURES  13 

of  various  corporate  securities,  of  which  large  amounts  were 
held  in  pledge  by  the  trustee  at  the  time  of  the  foreclosure  of 
the  mortgage  in  1896.  At  the  present  time  nearly  all  large 
railroad  mortgage  indentures  include  pledges  of  corporate  securi- 
ties in  addition  to  the  mortgage  lien  on  the  real  property  and 
appurtenances. 

The  panic  of  1893  and  the  hard  times  ensuing  led  to  defaults 
under  many  railroad  mortgages,  resulting  in  foreclosure  sales 
followed  by  comprehensive  reorganizations.  In  most  cases 
such  reorganizations  involved  the  issue  of  long-time  bonds  of 
large  amounts  secured  by  all-embracing  mortgages,  and  pro- 
viding particularly  for  the  increase  of  the  initial  debt  by  the 
issue  of  additional  bonds  for  refunding  and  improvement  pur- 
poses. The  mortgages  of  the  great  reorganized  railroad  com- 
panies, such  as  the  Southern,  the  Erie,  the  Northern  Pacific, 
the  Atchison,  and  the  Union  Pacific,  made  from  1894  to  1896, 
were  the  result  of  comprehensive  study  of  such  instruments  by 
many  counsel,  and  they  established  the  form  of  the  corporate 
mortgage  now  substantially  followed. 

The  foregoing  sketch  of  the  development  of  corporate  mort- 
gages, while  in  no  sense  exhaustive,  is  given  as  affording  a  useful 
and  perhaps  interesting  preliminary  to  the  announced  subject 
matter  of  these  papers — the  preparation  of  corporate  mortgages, 
bonds,  collateral  trusts  and  debentures,  the  further  discussion 
in  this  lecture  being  devoted  to  special  consideration  of  corpo- 
rate bonds  and  mortgages. 

Corporate  Bonds  and  Mortgages 

In  the  treatment  of  this  subject  some  definitions  of  terms 
may  be  useful.  As  herein  employed,  the  term  "  corporate  mort- 
gage" is  to  be  understood  as  referring  to  a  corporate  indenture 
intended  to  convey  real  property  and  appurtenances,  and 
usually  franchises,  as  security  for  corporate  obligations  issued 
or  to  be  issued  in  series.  The  term  "collateral  trust"  is  limited 
to  conveyances  by  way  of  pledge  of  corporate  stocks  and 


14     PREPARATION  OF  CORPORATE  BONDS,  MORTGAGES 

bonds  with  or  without  other  intangible  personal  property. 
The  term  "debentures"  is  confined  to  obligations  issued  under 
an  indenture  which  provides  no  security  by  way  of  mortgage  or 
pledge,  but  which  may  or  may  not  contain  covenants  afford- 
ing protection  to  debenture  holders  by  way  of  equitable  mort- 
gage or  covenant  for  future  mortgage,  or  covenants  conferring 
other  privileges  upon  the  holders. 

It  would  be  impossible,  within  reasonable  compass,  to  describe 
in  detail  the  almost  innumerable  variations  in  the  provisions 
of  different  issues  of  corporate  obligations  and  of  instruments 
securing  or  safeguarding  the  same.  The  scope  of  this  paper 
necessarily  must  be  confined  to  an  outline  of  the  essential 
and  customary  forms  of  such  instruments.  Preliminarily  to 
undertaking  actually  to  prepare  the  mortgage,  the  draftsman 
should  obtain  complete  information  not  only  (1)  as  to  the  per- 
tinent provisions  of  the  constitution  or  the  statutes  of  the 
States  having  jurisdiction  over  the  corporation  or  the  corporate 
property,  and  corporate  compliance  with  such  provisions,  but 
also  as  to  (2)  the  conditions  under  which  the  debt  is  to  be 
contracted  and  its  possible  amount  as  affected  by  statutory 
restrictions ;  (3)  the  form  of  the  obligation  to  be  issued  to  evi- 
dence the  debt  and  the  privileges  to  be  given  to  the  holders  of 
such  obligations ;  and  (4)  the  general  character  of  the  security 
to  be  provided,  or  the  benefits  to  be  afforded  by  the  indenture 
providing  for  and  governing  the  issue  of  the  obligations. 

(1)  As  to  corporate  authority.  Except  as  restricted  by  con- 
stitution or  statute  or  by  provision  of  the  charter  or  by-laws, 
as  before  stated,  a  corporation  has  implied  power  for  its  proper 
corporate  purposes,  to  contract  debts  and  to  issue  written 
obligations  evidencing  such  debts.  This  is  true  of  railroads 
and  public  utilities  corporations  as  well  as  of  private  business 
companies.  If  there  be  no  incident  mortgage  or  pledge  of 
property,  inquiry  may  be  limited  to  ascertaining  whether  the 
ordinary  borrowing  power  of  the  corporation  is  subject  to  any 
express  limitation  or  regulation  either  in  the  constitution  or 


COLLATERAL  TRUSTS  AND  DEBENTURE  INDENTURES   15 

laws  of  the  State  of  incorporation,  or  possibly,  of  any  State  in 
which  corporate  property  has  a  situs,  or  in  the  charter  or  the 
by-laws  of  the  corporation.  Care  must  be  taken  to  meet  all 
such  requirements.  At  this  point,  it  is  not  necessary  to  con- 
sider what  may  be  the  rights  of  bona  fide  holders  of  securities 
issued  ultra  vires.  It  is  the  duty  of  counsel  to  avoid  any  such 
questions  by  examination  into  and  compliance  with  specific 
legal  requirements. 

If,  however,  the  borrowing  corporation  purposes  to  give 
security  for  its  debts,  as  before  stated,  a  sharp  distinction  must 
be  drawn  between  corporations  operating  under  public  fran- 
chises and  those  conducting  private  businesses.  In  this  coun- 
try, as  well  as  in  England,  the  general  rule  is  that  when  the 
government  grants  a  franchise  to  a  particular  person,  it  is  pre- 
sumed to  trust  that  person,  and  no  other,  and  the  powers  con- 
ferred are  not  transferable  unless  expressly  authorized  by  law. 

A  private  business  corporation,  however,  as  before  stated, 
has  the  same  implied  power  to  mortgage  and  pledge  its  property 
to  secure  its  debts,  as  it  has  in  respect  of  the  contracting  of  the 
debts.  The  restrictions  are  such  only  as  may  be  imposed  by 
constitution  or  statute  or  by  express  provision  of  the  charter  or 
by-laws. 

(2)  The  character  of  the  debt  and  the  conditions  under  which  it  is 
contracted.  Where  the  debt  in  its  entirety  has  been  or  is  con- 
tracted antecedently  to  or  contemporaneously  with  the  execution 
of  the  indenture,  of  course  no  question  is  presented  as  to  the  con- 
ditions upon  which  the  debt  may  be  incurred.  But  if,  as  gener- 
ally is  the  case  in  corporate  borrowings,  a  considerable  part  or  all 
of  the  debt  is  to  be  contracted  subsequently  to  the  execution 
of  the  mortgage  or  indenture,  the  conditions  under  which  it 
is  to  be  incurred  must  be  presented  with  definiteness.  The 
amount  of  the  debt  to  be  secured  is  the  essence  of  the  mort- 
gage or  pledge.  It  affects  directly  the  rights  of  every  bond- 
holder, and  the  courts  will  hold  the  mortgagor  and  the  trustee 
to  strict  compliance  with  the  terms  of  the  instrument  authoriz- 


16      PREPARATION  OF  CORPORATE  BONDS,  MORTGAGES 

ing  the  creation  of  the  debt.  The  method  of  expressing  such 
terms  in  the  indenture  will  be  considered  later. 

Wherever,  as  in  many  States,  the  amount  of  corporate  in- 
debtedness is  limited  either  by  reference  to  the  amount  of  the 
capital  stock  or  otherwise,  any  possible  excess  of  debt  must 
be  carefully  guarded  against. 

(3)  The  form  of  the  obligation  to  evidence  the  debt  and  the  privi- 
leges to  be  given  to  holders.  Under  this  head,  special  forms  of 
corporate  securities  such  as  equipment-trust  obligations,  de- 
mand obligations,  etc.,  are  not  considered.  We  are  now  con- 
sidering only  corporate  obligations  to  pay  at  stated  times,  issued 
in  series  for  circulation  in  the  markets,  and  constituting  charges 
upon  the  general  credit  of  the  corporation.  If  sufficient  for 
identification,  even  by  parol,  the  simplest  statement  of  indebted- 
ness will  entitle  the  obligations  to  the  benefit  of  the  security  so 
far  as  concerns  merely  the  payment  of  the  debt.  The  elabora- 
tions of  the  obligation  are  intended  as  inducements  to  purchasers. 

Primarily,  a  corporate  bond  contains  a  promise  to  pay  a 
fixed  sum  at  a  time  and  place  specified,  and  to  pay  interest 
thereon  at  a  rate,  time  and  place  also  specified.  To  identify  the 
bonds  as  entitled  to  the  benefits  of  the  indenture,  the  bonds  set 
forth  the  amount  and  title  of  the  issue,  and  the  parties  and 
date  of  the  indenture,  and  refer  to  the  indenture  for  a  statement 
of  the  security  (if  any)  and  the  rights  of  the  trustee  and  of  the 
bondholders  in  respect  of  such  security  or  under  such  indenture.1 

There  is  a  recital  also  that  certification  by  the  trustee  under 
the  indenture  is  requisite  to  the  enforcibility  of  the  bond. 

1  A  mere  recital  that  the  bonds  are  issued  under  an  indenture,  according  to  a 
Minnesota  decision  (Guilford  v.  Minneapolis  &c.  Ry.,  48  Minn.  560 ;  1892.  51 
N.  W.  658 ;  1892.  Elliott  on  Railroads,  Vol.  1,  pp.  653-654  ;  1907  ;  Sec.  484) 
does  not  limit  the  rights  of  the  holder  of  the  bond.  (See  also  49  L.  R.  A.,  N.  S. 
155-159  and  Mr.  Foster's  exhaustive  brief  in  Watson  v.  C.  R.  I.  &  P.  R.  #.,169 
App.  Div.  N.  Y.  663;  1915).  But,  if  the  indenture  contain  provisions  render- 
ing uncertain  the  date  of  maturity  of  the  bond,  and  these  are  brought  into  the 
bond  by  its  reference  to  the  indenture,  the  bond  may  have  been  deprived  of 
negotiability  (McClelland  v.  Norfolk  <fe  Southern  R.  R.,  110  N.  Y.  469;  1888). 
No  such  effect  would  result  if  the  contingency  be  merely  to  make  the  bond 


COLLATERAL  TRUSTS  AND  DEBENTURE  INDENTURES  17 

This  certification  then  becomes  as  essential  to  the  validity  of 
the  bonds  as  to  the  security  thereof  by  the  indenture.1 

Such  a  simple  bond  properly  executed  and  attested  is  the 
stock  upon  which  from  time  to  time  have  been  grafted  various 
provisions  intended  to  make  the  bonds  attractive  to  purchasers 
or  to  protect  the  obligor.  The  number  and  variety  jof  such 
provisions  are  many,  limited  only  by  the  ingenuity  of  the  bor- 
rower and  the  necessity  of  avoiding  any  contravention  of  the 
promise  to  pay.  Some  of  the  more  usual  provisions  may  be 
noted. 

(a)  The  first  important  provision  concerns  the  form  of  obli- 
gation whether  as  coupon  bonds  payable  to  bearer  (with  or 
without  a  provision  for  the  registration  of  the  principal  in  the 
name  of  the  owner),  or  as  registered  bonds  without  coupons, 
payable  both  principal  and  interest  to  the  registered  holder  or 
assigns.  If  the  bonds  are  issuable  in  each  form,  the  market 
now  expects  that  the  coupon  bonds  and  registered  bonds  shall 
be  interchangeable.  In  such  case  the  bonds  must  state  briefly 
the  conditions  upon  which  the  registration  or  the  interchange 
may  be  made.  The  coupons  attached  to  coupon  bonds  in- 
variably are  payable  to  the  bearer  regardless  of  the  registration 
of  the  principal. 

(6)  The  bonds  may  be  issuable  in  various  denominations  and 
the  several  denominations  may  or  may  not  be  interchangeable. 
If  the  denominations  are  interchangeable,  the  conditions  of 
interchange  should  be  set  forth. 

(c)  It  is  advisable  always  to  include  in  the  bond  a  waiver  of 

become  due  earlier  than  a  date  fixed  for  maturity  (Chicago  Railway  Equipment 
Co.  v.  Merchants  National  Bank,  136  U.  S.  268 ;  1889.  Negotiable  Instruments 
Law,  New  York  Consolidated  Laws,  Chap.  43,  Sec.  23-2).  The  present  policy 
of  the  Stock  Exchange  disfavors  the  restricting  clause  considered  in  the  Rock 
Island  case  (169  App.  Div.  663 ;  1915)  and  it  would  be  better  now  to  adopt  the 
form  quoted  by  Mr.  Foster :  "The  principal  sum  of  this  bond  may  be  declared 
due  before  the  date  above  stated  in  the  manner  and  with  the  effect  provided  in 
said  trust  deed."  Consideration  will  be  given  later  to  the  provisions  of  the 
trust  deed  in  this  particular. 

1  Maas  v.  Mo.  Kan.  &  Texas  Ry.,  83  N.  Y.  223 ;   1880. 
C 


18     PREPARATION  OF  CORPORATE  BONDS,  MORTGAGES 

liability  of  officers,  directors  and  stockholders,  even  if  at  the 
time  of  the  issue  of  the  bond  no  such  liability  exists.  Subse- 
quent use  or  acceptance  of  statutory  provisions  of  consolidation 
or  amendment  of  charter  or  otherwise,  may  constitute  an 
acceptance  of  all  statutory  burdens  existing  at  the  later  date 
and  may  involve  a  personal  liability  not  existing  at  the  date  or 
at  the  issuance  of  the  bond.  Indeed,  comparatively  recently 
the  Supreme  Court  of  the  United  States  has  held  that  a  cor- 
poration formed  in  a  State  without  stockholders'  liability,  but 
declared  to  be  intended  for  business  in  a  State  with  such  lia- 
bility, may  by  carrying  on  such  business  bring  its  members 
under  the  liability  laws  of  the  latter  State.  The  better  practice 
is  to  insert  the  waiver  in  the  bond  as  well  as  in  the  indenture. 

(d)  It  is  the  general  practice  to  make  the  payment  of  the 
obligation  subject  to  acceleration  in  case  of  default  in  one  or 
more  of  the  covenants  in  the  bond  or  in  the  indenture.     It  is 
well  that  such  a  statement  should  appear  also  in  the  bonds. 
Otherwise,  in  such  case,  the  default  will  not  entitle  the  trustee 
to  foreclose  for  the  principal  debt.1 

(e)  If  the  obligor  desires  to  reserve  the  right  of  redemption 
of  some  or  all  of  the  bonds  before  maturity,  the  condition  upon 
which  such  right  may  be  exercised  should  be  briefly  stated. 
In  this  connection,  the  Stock  Exchange  Committee  requires 
a  clear  statement  of  the  method,  the  notice  and  the  period 
for  which  notice  shall  be  given. 

(f)  If  a  sinking  fund  is  to  be  set  up,  there  may  well  be  a  brief 
statement  referring  to  the  mortgage  provisions  therefor. 

(g)  Any  right  to  convert  the  bond  into  stock  should  be  also 
the  subject  of  reference  to  mortgage  provisions  sufficient  to 
cover  contingencies  of  consolidation,2  of  increases  of  stock,  or 
the  creation  of  preferred  stock. 

1  Cf.  Mallory  v.  W.  S.  R.  R.,  35  Superior  Ct.  (N.  Y.)  174 ;  1874.     See  also, 
Batchelder  v.  C.  G.  W.  Co.,  131  N.  Y.  42  ;  1892.     Watson  v.  C.  R.  I.  &  P.  R.  R.  Co., 
169  App.  Div.  663  ;  1915.    And  Jones'  Corp.  Securities,  Sec.  56  ;  Ed.  3. 1907. 

2  Rosenkrans  v.  Lafayette  &c.  Ry.,  18  Fed.  513  ;   1883.    Parkinson  v.  West 
End  Ry.,  173  Mass.  446 ;  1899 ;  53  N.  E.  891 ;  1899. 


COLLATERAL  TRUSTS  AND  DEBENTURE  INDENTURES   19 

These  last  three  points  will  be  considered  more  fully  in  con- 
nection with  the  subject  of  Collateral  Trust  Indentures. 

Prior  to  the  outbreak  of  the  present  European  war,  attended 
by  wide  and  perilous  fluctuations  in  exchange  discouraging 
such  practice,  it  was  quite  customary  in  large  bond  issues  to 
provide  for  the  issue  of  bonds  payable  at  the  option  of  the 
holder  at  home  in  United  States  gold  coin,  or  abroad,  and  in 
the  latter  event,  in  foreign  currencies,  sometimes,  in  one  or 
more  such  currencies,  or  at  one  or  more  places.  Such  an  obli- 
gation must  define,  or  render  possible  of  certain  definition,  the 
amount  payable  in  each  designated  place,  or  it  will  not  be 
negotiable.1 

Until  the  enactment  of  the  Federal  Income  Tax  Law,  it  was 
almost  invariably  the  practice  for  the  obligor  to  covenant  to 
pay  principal  and  interest  without  deduction  for  taxes.  While 
this  covenant  still  is  demanded  generally  by  investors,  many 
large  corporations,  realizing  the  uncertainty  of  the  obligation, 
are  adopting  the  policy  of  omitting  any  such  provision  from 
recent  bond  issues.  It  is  asserted,  and  it  also  is  denied,  that 
the  present  Federal  Income  Tax  Law  makes  void  any  subse- 
quent promise  of  an  obligor  to  pay  the  normal  federal  income 
tax  of  the  holder  of  the  bond  in  respect  thereof.  In  absence 
of  a  controlling  adjudication  it  is  better  not  to  insert  such  a 
promise.2 

The  ordinary  coupon  is  a  promise  to  pay  a  specific  sum  at  a 
certain  time  and  place,  stated  to  be  interest  for  a  named  period 
upon  a  bond  bearing  an  indicated  number.  If  the  bond  be 
subject  to  redemption  before  the  due  date  of  the  coupon, 
the  coupon  should  recite  that  its  payment  is  subject  to  the 
call  of  the  bond  for  previous  redemption.  In  view  of  the 
many  judicial  opinions  that  for  most  purposes  a  detached 
coupon  constitutes  a  separate  and  distinct  obligation  of  the 

1  Parsons  v.  Jackson,  99  U.  S.  434 ;    1878. 

2  Haight  v.  Pittsburgh  &c.  R.  R.,  6  Wall.  (U.  S.)  15 ;   1868.     The  provision 
referred  to  is  omitted  from  the  new  Income  Tax  Act  of  1916. 


20     PREPARATION  OF  CORPORATE  BONDS,  MORTGAGES 

corporation,1  it  is  desirable  that  the  coupon  itself  should  dis- 
tinctly state  every  intended  qualification  of  the  direct  promise 
to  pay. 

The  trustee's  certificate,  usually  endorsed  on  bonds,  is 
merely  a  statement  that  the  bond  is  one  of  the  bonds  men- 
tioned in  the  indenture,  and  is  signed  by  the  trustee. 

(4)  The  general  character  of  the  security  or  the  benefits  to  be 
provided  for  the  bonds. 

The  security  may  be  a  mortgage  of  real  estate  or  of  chattels, 
or  a  pledge  or  assignment  of  bonds,  stock  or  other  securities, 
and  may  or  may  not  be  subject  to  prior  liens.  Most  large 
mortgages  include  some  of  each  of  the  several  classes  of  property. 

The  security  may  be  for  the  protection  of  two  or  more  series 
of  bonds,  the  several  series  not  ranking  equally  but  having 
relative  priorities.  The  Stock  Exchange  Committee  considers 
it  undesirable  to  have  different  series  of  bonds  of  unequal  rank 
secured  by  mortgage  to  the  same  trustee ;  but  oftentimes  such 
a  unity  is  the  necessary  result  of  preexisting  obligations.  An 
illustration  of  prior  lien  series  and  subordinate  lien  series  of 
bonds  secured  by  the  same  instrument,  is  the  First  Consoli- 
dated Mortgage  of  1895  of  the  Erie  Railroad  Company  and  the 
recent  Consolidation  Mortgage  of  1913  of  the  New  York  Cen- 
tral, the  latter  securing  several  classes  of  previously  issued  bonds 
entitled  to  different  relative  liens  on  the  mortgaged  property. 
It  is  not  easy  to  draw  an  instrument  to  express  with  artistic 
completeness  the  relative  rights  of  different  lien  holders  in  rela- 
tion to  the  many  provisions  of  the  instrument.  Of  course,  if 
the  subordinate  lien  is  created  by  a  different  instrument,  it  is 
comparatively  simple  to  recognize  prior  liens  by  an  appropriate 
reference  in  the  grant. 

If  there  be  no  security,  some  of  the  provisions  appearing  in 
indentures  affording  benefit  to  bondholders,  are  covenants  to 

i  Watson  v.  C.  R.  I.  &  P.  R.  R.,  169  N.  Y.  App.  Div.  663 ;  1915.  Con- 
tinental Securities  Co.  v.  N.  Y.  Central  R.  R.,  217  N.  Y.  119 ;  1916. 


COLLATERAL  TRUSTS  AND  DEBENTURE  INDENTURES  21 

make  no  future  mortgage,  or  to  secure  the  bonds  under  and  by 
a  future  mortgage,  if  any  be  given,  or  to  maintain  a  specified 
amount  of  quick  assets,  or  to  provide  a  sinking  fund  to  redeem 
the  bonds. 

Some  of  the  matters  to  be  considered  in  stating  these  rights 
will  be  referred  to  in  discussing  the  form  of  collateral  trusts  or 
debentures. 

The  Modern  Corporate  Mortgage 

The  corporate  mortgage  of  the  present  day,  as  a  result  of 
the  great  advance  in  the  activities  and  needs  of  corporations, 
particularly  railroad  corporations,  has  taken  on  form,  features 
and  dimensions  vastly  different  from  the  early  indentures  which 
we  have  been  considering,  and  includes  an  elaborate  contract  as 
well  as  provisions  for  an  expanding  lien. 

The  following  illustrations  may  be  given  of  a  few  of  the  com- 
plexities of  the  contract  for  which  provision  must  be  made  in 
the  mortgage  indenture  and  of  the  reasons  therefor : 

(a)  The  investment  market  requires  a  form  of  obligation 
which  may  be  made  non-negotiable,  partly  or  wholly,  tem- 
porarily or  permanently,  in  order  to  protect  trustee  holdings, 
or  to  guard  against  loss  by  theft.  Thus  are  required  (as 
a  substitute  for  the  early  day  safety  precaution  of  detaching 
all  coupons)  detailed  provisions  for  the  registration  of  the  prin- 
cipal sum  of  the  bonds  (leaving  the  interest  to  continue  to  be 
payable  to  the  bearer  of  the  coupons)  or  else  for  the  registration 
of  the  bond  as  to  both  principal  and  interest  (in  which  case  the 
mortgage  should  recite  the  form  of  such  fully  registered  bond), 
and  finally  for  the  interchange  of  coupon  bonds  and  fully  regis- 
tered bonds.  Until  a  comparatively  recent  date,  such  inter- 
change was  not  provided  for,  and  the  consequence  was  that  at 
times  the  market  quotation  of  coupon  bonds  and  registered 
bonds  without  coupons  of  the  same  issue  varied  by  more  than 
one  per  cent.  The  most  succinct  statement  in  the  indenture 
of  such  rights  of  registration  and  interchange  would  cover  as 


22     PREPARATION  OF  CORPORATE  BONDS,  MORTGAGES 

many  folios  as  were  contained  in  the  old  Erie  mortgage  of 
1849. 

(6)  The  modern  mortgage  generally  must  be  something  more 
than  a  security  for  a  debt  then  or  theretofore  created.  In  most 
cases  it  embodies  an  agreement  to  provide  for  future  advances. 
If  the  mortgage  debt  is  subject  to  increase,  then  of  necessity 
there  must  be  expressed  precisely  the  conditions  of  increase. 
The  investing  public,  through  the  bond  distributing  houses  and 
the  large  investing  institutions  such  as  the  insurance  companies, 
require  a  greater  and  greater  specification  of  the  safeguards  in 
connection  with  any  permission  to  augment  the  mortgage  debt. 
If  the  increase  is  to  be  allowed  for  additions  and  improvements, 
the  mortgagor  must  be  required  to  furnish  elaborate  statements 
as  to  the  construction  or  the  acquisition  to  be  paid*  for  out  of 
the  additions  to  the  debt.  If  only  the  refunding  of  prior  obli- 
gations is  the  purpose  of  increase,  then  again  there  is  necessary 
a  recital  of  the  conditions  governing  increase  for  that  purpose 
and  a  prescription  of  the  method  in  which  the  refunding  is  to 
be  accomplished.  Occasionally  the  refunding  is  of  bonds  of  sub- 
sidiary corporations,  which,  of  course,  will  involve  still  further 
details  of  procedure.  There  are  many  recent  corporate  mort- 
gages in  which  the  provisions  concerning  additional  bond  issues 
cover  ten  times  the  number  of  printed  pages  required  for  the 
old  Erie  mortgage. 

(c)  In  view  of  the  ready  currency  of  corporate  obligations  in 
the  investment  market  and  of  the  large  amount  of  the  aggre- 
gate debt,  the  individual  trustee  has  given  place  to  a  corporate 
trustee  to  accept  the  mortgage  conveyance,  and  by  its  certificate 
to  authenticate  the  bonds  as  being  issued  in  accordance  with 
the  terms  of  the  mortgage  indenture,  thus  interposing  protection 
against  irregular  or  unauthorized  issues.  This  development 
has  been  accompanied  by  a  further  specification  of  the  duties  of 
the  trustee.  Corporate  mortgages  of  realty  continue  to  confer 
upon  the  trustee  a  power  to  enter  and  to  operate  the  mortgaged 
premises,  but  the  present  effect  of  this  provision  is  little  else 


COLLATERAL  TRUSTS  AND  DEBENTURE  INDENTURES  23 

than  to  afford  a  basis  for  the  appointment  of  a  court  receiver 
and  for  the  assertion  of  a  claim  upon  the  income.  Existing 
State  laws  limiting  the  powers  of  foreign  corporations  may 
effectually  nullify  a  granted  power  to  a  corporate  trustee  to 
enter  and  operate,  even  though  the  trustee  were  willing  to 
assume  the  liabilities  incident  to  the  conduct  of  a  complex 
business.  Consequently,  there  has  grown  up  the  custom  of  a 
more  comprehensive  specification  of  the  remedies  available  to 
a  trustee  in  case  of  default.  Oftentimes  the  mortgaged  proper- 
ties extend  through  several  different  States,  with  varying  and 
often  conflicting  laws,  and  it  is  the  prevailing  opinion  that  in 
the  interest  of  expeditious  and  uniform  procedure,  there  shall  be 
a  definite  statement  of  the  rights  of  the  trustee  and  the  bond- 
holders, as  full  as  practicable  in  view  of  the  diversity  of  laws. 
Among  the  important  rights  thus  specified  are  generally,  the 
right  to  declare  the  entire  principal  due  in  case  of  default  in 
the  payment  of  any  interest  or  of  default  in  one  or  more  other 
conditions,  with  a  reserved  right  of  waiver  (which  is  quite 
necessary),  the  right  to  foreclose  by  suit  or  otherwise  as  may 
be  advised  by  counsel,  the  right  to  sell  without  such  foreclosure 
(limited  in  practice  generally  to  sale  of  pledged  stocks  and 
bonds),  the  right  to  recover  a  deficiency  judgment  for  the 
benefit  of  bondholders,  the  right  to  apply  for  a  receiver,  the 
right  of  the  bondholders  to  precipitate  the  maturity  of  the  prin- 
cipal upon  a  foreclosure  sale  for  default  in  interest,  the  right 
of  the  bondholders  to  use  the  bonds  and  coupons  in  payment  of 
the  purchase  price  of  the  mortgaged  property  upon  a  foreclosure 
sale,  the  limitation  upon  the  right  of  the  bondholder  to  sue 
under  the  indenture  unless  the  trustee  shall  fail  in  its  duty,  and 
the  waiver  by  the  mortgagor  of  any  right  to  claim  the  benefit 
of  any  stay  or  extension  or  appraisement  laws. 

(d)  The  corporate  mortgage  of  to-day  includes  a  varying 
number  of  covenants,  designed  principally  to  compel  the  com- 
pany to  maintain  the  priority  and  integrity  of  the  mortgage 
security.  In  the  old  Erie  mortgage  above  mentioned,  the  only 


24     PREPARATION  OF  CORPORATE  BONDS,  MORTGAGES 

covenant  is  one  to  execute  further  assurances.  The  number  and 
the  scope  of  the  covenants  now  inserted  in  such  instruments  vary 
according  to  the  character  of  the  corporation  and  the  nature  of 
the  security.  Generally  speaking,  more  comprehensive  cove- 
nants are  required  from  a  strictly  private  corporation  than  from 
a  quasi-public  or  public  utility  corporation,  whose  corporate 
transactions  promptly  become  publicly  known.  It  would  seem 
that  the  larger  and  more  prominent  the  corporation,  the  less  is 
the  number  of  covenants  deemed  necessary  by  bond  buyers. 
Oftentimes,  the  security  is  of  a  nature  that  suggests  and  re- 
quires covenants  of  special  application.  To  illustrate,  in  the 
Interborough  Rapid  Transit  mortgage  of  1912,  which  operates, 
or  in  the  future  will  operate,  under  many  different  contracts, 
leases  and  certificates,  there  are  numerous  covenants  strictly 
limited  in  application,  but  deemed  necessary  to  prevent  im- 
pairment of  the  mortgage  security  by  defaults  by  the  Company 
under  its  leasehold  and  other  estates.  So  in  a  case  where  part 
or  all  of  the  security  under  an  indenture  consists  of  shares  of 
stock  or  bonds  of  other  corporations,  the  mortgagor  must  be  and 
always  is  shorn  of  power  to  alter  the  capitalization  of  such  cor- 
porations to  the  detriment  of  the  security  under  the  indenture. 
(e)  The  events  of  default  upon  which  the  trustee  may  assert 
the  remedies  provided  by  the  mortgage  are  specified  in  corre- 
spondence with  the  respective  covenants.  It  is  not  practicable 
to  include  within  a  single  omnibus  default  clause  the  right  of 
the  mortgagee  to  exercise  the  remedy  upon  default  in  any 
of  the  covenants.  The  period  of  grace  intervening  between 
a  default  and  the  enforcement  of  the  remedy  therefor,  upon  a 
reasonable  view  of  its  application,  may  properly  vary  according 
to  the  nature  of  the  default,  as  for  instance,  a  longer  period 
of  grace  is  allowed  after  default  in  payment  of  taxes  than  after 
a  default  in  interest.  Less  important  covenants  may  be  the 
subject  of  actionable  default  only  after  notice  and  demand 
of  performance  shall  have  been  made  on  the  company.  In 
other  cases,  the  period  of  grace  should  begin  to  run  without  re- 


COLLATERAL  TRUSTS  AND  DEBENTURE  INDENTURES  25 

quirement  of  precedent  notice,  notably  in  case  of  failure  to  pay 
interest,  a  default  as  to  which  the  mortgagor  has  the  earlier 
knowledge.  Oftentimes,  as  in  the  case  of  the  Interborough 
Rapid  Transit  mortgage,  the  events  of  default  are  numerous. 

(/)  The  reservation  to  the  mortgagor  of  the  right  to  obtain 
releases  from  the  trustee  upon  stated  conditions,  is  another 
highly  important  feature  of  the  modern  mortgage.  The  neces- 
sities of  a  trunk-line  railroad,  for  instance,  to  obtain  for  various 
purposes  releases  of  portions  of  its  mortgaged  properties  are 
often  imperative,  particularly  in  connection  with  dealings  with 
governmental  authorities.  Provisions  for  releases  of  mortgaged 
property  require  careful  drafting  in  order  to  protect  the  bond- 
holder and  the  trustee,  and  at  the  same  time  afford  to  the 
company  reasonable  freedom  of  action.  Precedents  may  be 
found  in  the  New  York  Central  mortgage  of  1913  and  the 
Northern  Pacific  mortgage  of  1914. 

It  is  such  complexities  of  contract  that  enlarge  some  of  the 
present-day  corporate  mortgages  to  volumes  of  two  hundred 
printed  pages.  It  has  been  remarked  that  it  was  devoutly  to 
be  wished  that  some  genius  would  arise  to  point  the  way  to  a 
reduction  of  the  text  of  such  instruments ;  but  where  the  oppor- 
tunity has  been  afforded  to  discuss  the  subject  with  such 
critics,  they  have  been  able  to  indicate  little  which  upon  full 
consideration  they  would  be  willing  to  omit.  Some  fifteen 
years  ago  the  eminent  general  counsel  of  a  railroad  in  the  Cen- 
tral States  submitted  a  form  of  refunding  mortgage  which  was 
unsatisfactory  to  the  bond-purchasing  bankers  as  being  in  what 
was  considered  a  primitive  style,  and  on  behalf  of  the  bankers 
there  was  submitted  a  form  of  mortgage  in  the  form  which 
had  become  familiar  in  New  York.  The  first  criticism  of  the 
railroad  counsel  was  the  general  one  that  to  a  large  extent  he 
regarded  most  of  the  provisions  of  the  mortgage  ineffectual. 
On  subsequent  and  careful  analysis  the  only  provision  which 
finally  he  was  prepared  to  condemn  as  useless  was  a  provision 
in  general  terms  that  as  a  matter  of  right  the  trustee  should  be 


26     PREPARATION  OF  CORPORATE  BONDS,  MORTGAGES 

entitled  to  the  appointment  of  a  receiver,  a  statement  which  he 
considered  assumed  to  limit  the  discretionary  power  of  the 
court,  but  which  had  proved  useful  in  aiding  the  court  to  exer- 
cise its  discretion.  One  New  York  .counsel  was  quite  out- 
spoken in  his  criticism  of  the  length  of  corporate  mortgages 
until  charged  with  the  duty  of  preparing  one  for  an  important 
street  railroad  system.  Upon  careful  consideration  of  this  it 
was  found  to  be  in  some  respects  more  elaborate  in  detail  than 
some  for  which  I  may  have  been  regarded  as  responsible. 

It  is  very  well  to  argue  that  various  provisions  expressly  set 
forth  in  a  corporate  mortgage  would  be  implied  in  any  event 
in  any  controversy  before  a  court;  but  it  may  be  said  that 
those  who  have  had  large  experience  in  such  matters  are  con- 
vinced that  the  answer  to  the  question  whether  rights  or  obli- 
gations will  be  implied  by  a  court,  oftentimes  is  affected  by  the 
atmosphere  surrounding  the  litigation.  Substantially  all  of 
the  provisions  from  time  to  time  added  to  corporate  mortgages 
have  been  intended  to  avoid  contentions  which  previously  had 
been  made  in  reported  cases.  Furthermore,  it  is  to  be  remem- 
bered that  a  substantial  part  of  the  modern  mortgage  concerns 
the  duties  and  responsibilities  and  immunities  of  the  corporate 
trustee.  In  practical  experience,  a  trust  company,  having 
many  corporate  mortgage  trusts,  is  called  upon  daily  to  per- 
form, or  to  refrain  from  performing,  acts  which  may  or  may 
not  be  specifically  provided  for  in  the  indenture.  If  they  are 
specifically  provided  for,  the  action  or  non-action  follows  as  a 
matter  of  course.  If  not  clearly  authorized,  the  question  is 
referred  to  counsel  for  advice,  with  incident  delay  and  expense. 
Perhaps  the  greatest  amount  of  study  and  care  in  the  drafting 
of  corporate  mortgages  has  been  to  regulate  specifically  the 
relative  rights  of  the  mortgagor  and  the  trustee  prior  to  any 
default  whatsoever.  Under  the  old  mortgages  prior  to  default 
the  trustee  was  regarded  generally  as  little  more  than  a  "  rubber 
stamp."  1  In  the  new  mortgages,  the  trustee's  activities  before 

1  Rhinelander  v.  Farmers  Loan  &  Trust  Co.,  172  N.  Y.  519 ;    1902. 


COLLATERAL  TRUSTS  AND  DEBENTURE  INDENTURES  27 

default  certainly  are  more  varied  and  oftentimes  involve  ques- 
tions more  difficult  than  are  raised  upon  a  foreclosure,  and  the 
provisions  for  the  protection  of  the  trustee  deserve  the  most 
careful  consideration  and  adequate  statement. 

From  this  extended  introduction,  we  may  proceed  now,  and, 
for  the  sake  of  emphasis,  at  the  risk  of  some  repetition,  to  indi- 
cate in  detail  the  general  method  of  preparing  the  indenture 
intended  to  regulate  the  issue  of  the  bonds,  to  express  the  rights 
and  remedies,  severally  and  respectively,  of  the  parties  to  the 
indenture  and  the  bondholders  and  to  provide  security  for  the 
bonds.  The  purpose  will  be  to  suggest  provisions,  and  the 
purpose  of  provisions,  which  have  been  adopted  as  the  result 
of  experience.  These  may  be  considered  conveniently  under 
the  following  heads : 

I.   Names  of  the  parties  and  the  preambles. 
II.   The  consideration  and  grant  or  the  assignment  in  trust. 

III.  The  conditions  governing  the  issue  of  the  bonds,  including  (1)  limi- 

tations in  amount,  and  (2)  conditions  of  (a)  certification  and 
delivery,  (6)  registration,  and  (c)  interchange  of  the  bonds. 

IV.  Particular  covenants  of  the  mortgagor. 

V.  Provisions  as  to  any  pledged  stocks  and  bonds. 

VI.  Remedies  of  trustees  and  bondholders. 

VII.  Releases  and  leases. 

VIII.  Consolidations,  mergers  and  purchases  affecting  the  mortgagor. 

IX.  Provisions  concerning  the  trustee. 

X.  Possession  prior  to  default,  and  defeasance. 

XI.  Acceptance  of  the  trust  by  the  trustee. 

XII.  Execution,  acknowledgment,  recording,  affidavits  of  good  faith, 

etc. 

XIII.  Miscellaneous  provisions. 

I.   Names  of  the  Parties  and  the  Preambles 

Of  course,  the  party  of  the  first  part  is  the  mortgagor.  Either 
following  its  corporate  name  or  in  the  preambles  should  be 
mentioned  the  State  of  incorporation,  and  whether  the  company 
was  organized  under  general  laws  or  created  by  special  charter, 


28     PREPARATION  OF  CORPORATE  BONDS,  MORTGAGES 

or  consolidation,  or  merger  or  otherwise.  The  party  of  the 
second  part  is  the  trustee  to  accept  and  to  hold  the  title  in 
trust  for  the  takers  of  the  bonds.  Any  person,  not  incom- 
petent or  an  infant,  even  a  bondholder,  may  be  trustee,  but, 
under  the  rules  of  the  Stock  Exchange,  not  a  director  or  officer 
of  the  mortgagor  company.  It  is  desirable,  however,  to  have 
a  corporate  trustee  to  control  the  issue  of  the  bonds,  and  to 
hold  possession  of  pledged  securities  or  moneys.  In  view, 
however,  of  the  varying  laws  of  the  several  States  limiting  the 
rights  therein  of  foreign  corporations,  in  many  jurisdictions  it  is 
safe  to  join  with  the  corporate  trustee  an  individual  to  act  as 
co-trustee.  In  this  particular  the  laws  of  the  several  States  are 
various  and  many  are  of  uncertain  scope.  A  statute  of  Cali- 
fornia assumes  to  require  the  association  of  a  California  trust 
company  with  every  foreign  trustee.  Even  the  law  of  New 
York  contains  provisions  l  which  may  limit  the  rights  of  a  for- 
eign trust  company  to  act  as  a  mortgage  trustee  of  property 
within  this  State.  If  there  be  more  than  one  trustee,  the  rela- 
tive rights  of  each  should  be  set  forth,  as  will  be  more  fully 
mentioned  in  the  discussion  of  the  provisions  concerning  the 
trustee. 

The  functions  of  the  preambles  following  the  naming  of  the 
parties,  are  first  to  explain  the  purposes  of  the  indenture,  and 
next  to  constitute  representations  by  the  maker  which  after 
the  issue  of  the  bonds  will  serve  as  an  estoppel  against  it  and 
those  claiming  under  it.  It  is  advisable  to  state  in  the  pre- 
ambles that  the  mortgage  and  the  bond  issue  have  been  duly 
authorized  by  due  corporate  proceedings,  but  it  is  best  not 
always  to  quote  literally  the  resolutions  of  the  directors  or  stock- 
holders, unless  it  is  absolutely  certain  that  as  quoted  the  resolu- 
tions are  legally  sufficient.  Such  a  quotation  of  resolutions  not 
legally  sufficient  may  be  ineffective  as  an  estoppel,  whereas  a 
simple  statement  of  due  authorization  would  be  entirely  effect- 
ive. The  fact  of  stockholders*  due  consent  to  the  mortgage 

1  N.  Y.  Banking  Law,  Sees.  233,  185,  —  Consolidated  Laws,  Chap.  10. 


COLLATERAL  TRUSTS  AND  DEBENTURE  INDENTURES  29 

should  similarly  be  recited  in  those  cases  where  it  is  required 
by  statute,  charter  or  by-laws.  This  is  desirable  especially  in 
the  State  of  New  York  to  obtain  the  protection  afforded  by 
Sec.  7  of  the  Stock  Corporation  Law  1  against  the  perils  of  a 
lack  of  sufficient  consent  by  stockholders.2  It  may  be  well 
also  to  insert  immediately  before  the  grant,  a  clause  stating 
expressly  that  all  acts  and  things  required  by  law  and  other- 
wise in  respect  of  the  mortgage  and  the  bonds  have  been  duly 
performed  and  complied  with :  thus  clearly  creating  an  estoppel 
operative  generally  in  favor  of  those  purchasing  bonds  upon 
faith  of  such  statement.3  Of  course,  as  to  acts  that  in  the  strict 
sense  are  ultra  vires  the  corporation,  there  can  be  no  estoppel, 
but  there  may  be  as  to  acts  irregularly  or  even  insufficiently 
performed  if  they  are  within  the  general  scope  of  the  powers 
conferred  by  the  legislature.4  Such  deficiencies  do  not  affect 
the  apparent  rights  of  bona  fide  purchasers  for  value,  and  the 
presence  of  such  an  express  assertion  of  regularity  may  assist 
the  purchaser  in  repelling  an  attack  upon  his  good  faith.5 

To  identify  the  debt  secured,  the  form  of  the  bonds,  the 
coupons  and  the  trustee's  certificate  usually  are  set  forth.  If 
variation  be  permitted  in  any  of  the  bonds  of  the  issue,  it  is 
prudent  to  make  a  brief  statement  of  the  authorized  variations. 
It  is  the  general  opinion  that  the  description  of  the  bonds  or 
debt  secured  should  be  precise;  and  if  practicable  it  is  well 
that  this  should  be  the  case,  but  I  believe  in  the  sufficiency  of 
any  description  of  the  debt  beyond  reasonable  possibility  of 
mistake.  In  this  view,  mere  subdivisions  of  amounts  or  slight 
variations  of  terms  would  not  affect  the  security  of  bonds  other- 
wise practically  identifiable. 

1  N.  Y.  Consolidated  Laws,  Chap.  61. 

2  Vail  v.  Hamilton,  85  N.  Y.  453 ;   1881 ;   The  Vigilancia,  73  Fed.  Rep.  452- 
457 ;   1896.    Hamilton  Trust  Co.  v.  Clemes,  17  N.  Y.  App.  Div.  152 ;   1897. 

3  City  Ry.  Co.  v.  Citizens1  St.  R.  R.  Co.,  166  U.  S.  557-566;  1896. 

4  Louisville  N.  A.  &  C.  Ry.  Co.  v.  Louisville  Trust  Co.,  174  U.  S.  552-574 ; 
1898. 

6  See  Logan  County  Bank  v.  Townsend,  139  U.  S.  67-72-76 ;  1890 ;  and  cases 
cited. 


30     PREPARATION  OF  CORPORATE  BONDS,  MORTGAGES 

II.    The  Consideration  and  the  Grant  or  the  Assignment  in  Trust 

After  the  preambles  follow  the  granting  clauses,  prefaced  by 
a  statement  of  the  consideration.  Formerly  this  was  stated 
as  being  a  nominal  sum  paid  by  the  trustee,  but  now  it  is 
recognized  that  besides  the  trustee's  reception  of  the  property 
for  the  specified  purposes  a  real  and  important  consideration 
exists  as  to  the  cestui  que  trusts,  that  is,  the  purchasers  of  the 
bonds,  and  as  to  them  the  principal  consideration  is  their  pur- 
chase and  acceptance  of  the  bonds. 

As  to  the  granting  clause,  it  may  be  said  first  that  if  the 
mortgage  be  of  real  property  the  description  should  be  suffi- 
cient to  enable  the  mortgage  to  be  made  a  record  lien.  In  the 
case  of  large  corporations  it  is  seldom  practicable  to  give  any 
detailed  description  of  the  property.  It  is  advisable  to  make 
the  grant  comprehensive  by  conveying  all  the  property  of  the 
company  in  specified  jurisdictions,  and  if  desired,  to  follow  the 
general  grant  by  stating  that  the  same  includes  property  there- 
after more  fully  described.  It  is  generally  convenient  by  a 
clause  of  exception  to  reserve  any  property  desired  to  be  re- 
tained free  of  the  mortgage  rather  than  to  describe  all  the 
property  that  is  included.  If  a  land  grant  is  to  be  included  this 
should  be  done  expressly  and  adequately,  for  land  does  not 
pass  as  appurtenant  to  other  land.1 

The  laws  of  the  jurisdictions  concerned  should  be  examined 
carefully  as  to  the  protection  of  any  mortgage  lien  upon  chattels. 
Generally  it  is  impracticable  to  give  a  satisfactory  lien  on  mov- 
ables, if  the  same  are  liable  to  pass  out  of  the  jurisdiction  in 
which  the  mortgage  is  recorded  or  filed  as  a  chattel  mortgage. 
The  question  is  important  where  the  mortgage  assumes  to  cover 
private  rolling  stock  or  other  vehicles.  As  to  railroads,  the 
statutes  of  many  States  declare  the  appurtenant  chattels  of  a 
railroad  to  be  real  estate  for  mortgage  purposes. 

Turning  for  a  moment  to  mining,  lumbering  and   trading 

1  N.  O.  Pac.  Ry.  v.  Parker,  143  U.  S.  42-55 ;    1891. 


COLLATERAL  TRUSTS  AND  DEBENTURE  INDENTURES  31 

companies,  it  may  be  observed  here  that  serious  questions  are 
presented  by  the  statutes  in  force  in  nearly  all  the  States  mak- 
ing void  any  instrument  which  purports  to  mortgage  stock  in 
trade  left  in  the  custody  of  the  mortgagor,  such  transactions 
being  deemed,  as  stated  in  the  early  cases,  "a  badge  of 
fraud." 

The  statutes  and  the  decisions  upon  this  point  in  the  several 
States  in  which  the  property  may  be  located  should  be  examined, 
and,  when  the  question  is  doubtful,  stock  in  trade  should  be 
excepted  from  the  mortgage  by  clauses  as  exclusive  as  language 
permits.  The  question  is  of  particular  importance  in  respect 
of  mortgages  of  mining  and  lumbering  companies  where  part  of 
the  realty  through  removal  or  severance  becomes  the  stock  in 
trade  of  the  owner. 

If  any  leaseholds  are  to  be  covered  by  the  mortgage,  the  con- 
sent of  the  lessor  should  be  obtained  if  the  lease  contains  a 
covenant  against  assignments.  While  the  making  of  a  mort- 
gage leaving  possession  in  the  mortgagor  does  not  constitute  a 
violation  of  such  a  covenant,  the  enforcement  of  the  mortgage 
by  entry  or  foreclosure  in  some  jurisdictions  would  constitute 
a  violation.1  It  is  doubtful  whether  the  reservation  from  the 
mortgage  of  the  last  day  of  the  term  of  the  lease  is  effective  to 
avoid  a  violation  of  such  a  covenant. 

If  the  security  includes  corporate  bonds,  stocks  and  other 
securities,  the  lien  should  be  effected,  if  practicable,  by  deposit 
of  the  same  with  the  trustee  in  order  to  create  a  legal  pledge. 
If  not  so  delivered,  the  same  should  be  expressly  assigned  and 
notice  of  the  assignment  should  be  given  to  the  persons  holding 
the  property. 

After  the  conveyance  of  the  property  owned  by  the  corpora- 
tion, it  is  important  to  determine  if  any  future-acquired  property 
is  to  be  included  in  the  mortgage.  It  is  well  settled  that,  being 
expressed  in  apt  language,  a  mortgage  of  after-acquired  property 

1  West  Shore  R.  Co.  v.  Wenner,  70  N.  J.  Law,  233 ;  1904.  Contra,  Riggs  v. 
Pursell,  66  N.  Y.  193  ;  1876.  Dunlop  v.  Mulry,  85  A.  D.  (N.  Y.)  498 ;  1903. 


32     PREPARATION  OF  CORPORATE  BONDS,  MORTGAGES 

is  practically  effective  as  a  lien.1  In  most  cases  the  value  of 
the  corporate  property  to  a  large  extent  depends  upon  its  use 
as  a  going  concern,  and  generally,  and  in  fact  almost  invariably, 
it  is  required  by  bond  buyers  that  the  mortgage  shall  cover  at 
least  all  after-acquired  property  used  in  connection  with  or  for 
the  purposes  of  the  business,  however  acquired  by  the  mortga- 
gor. It  is  argued  by  Mr.  Machen  2  that  the  after-acquired 
property  grant  should  cover  income,  not  qua  income,  but  as 
after-acquired  property.  This,  however,  has  not  been  finally 
adjudicated,  and  if  so  desired  it  should  be  so  stated.  In  that 
case  the  trustee  might  be  entitled  to  the  income  accumulated 
prior  to  his  demand  for  possession,  or  receivership. 

It  is  logical  and  desirable  also  to  include  in  the  mortgage  all 
after-acquired  property,  even  if  not  used  in  connection  with 
the  described  premises,  if  such  acquisition  be  made  out  of 
moneys  representing  proceeds  of  bonds  or  of  released  property ; 
but  it  is  in  order  to  reserve  expressly  from  the  mortgage  full 
right  on  the  part  of  the  mortgagor  to  own  or  to  acquire,  free 
from  the  lien,  any  property  not  acquired  for  use  in  connection 
with  the  mortgaged  premises  or  with  moneys  derived  from  the 
bonds  or  under  the  mortgage. 

If  the  corporation  possesses  and  exercises  any  franchise  — 
as  is  the  case  with  all  public  service  corporations  —  such  fran- 
chise should  be  included  in  the  mortgage,  for  otherwise  the 
property  would  have  little  value  to  a  purchaser  on  foreclosure.3 

1  Pennock  v.  Coe,  23  How.  (U.  S.),  117 ;   1859. 

An  interesting  question  not  yet  finally  determined  arises  in  connection 
with  the  consolidation  of  two  railroads  each  subject  to  an  after-acquired  property 
mortgage.  (N.  Y.  Security  v.  L.  N.  E.  &  St.  L.  Consol.  Ry.,  102  Fed.  382 ; 
1900 ;  and  cases  cited.)  It  has  been  held  by  the  United  States  Circuit  Court  in 
an  able  opinion  by  Judge  Woods  that  such  a  lien  will  not  attach  to  the  equip- 
ment acquired  after  the  consolidation  by  the  new  company.  This  point  should 
be  covered  both  as  to  equipment  and  as  to  other  accessions  after  consolidation, 
either  one  way  or  the  other.  See  also  Compton  v.  Jesup,  68  Fed.  263 ;  1895. 
Polhemus  v.  Fitchburg  R.  R.,  123  N.  Y.  502 ;  1890. 

»  Machen,  Modern  Law  Corporations,  Sec.  1879  (1908). 

3  See  Lord  v.  Yonkers  Fuel  Gas  Co.,  99  N.  Y.  547 ;  1885.  101  N.  Y.  614 ; 
1886. 


COLLATERAL  TRUSTS  AND  DEBENTURE  INDENTURES  33 

The  franchise  rights  mortgaged,  of  course,  may  not  include  the 
franchise  to  be  a  corporation,  which  franchise  is  not  ordinarily 
the  subject  of  sale  or  mortgage.1  There  should  be  included 
also  the  income  and  profits  of  the  corporation,  thus  creating  a 
lien  thereon  which  will  become  effective  after  entry  by  the 
trustee  or  by  a  mortgage  receiver,2  or  upon  the  institution  of  a 
suit  for  possession  as  distinguished  from  a  suit  for  foreclosure 
and  sale.3 

The  habendum  clause  should  run  to  the  trustee,  its  succes- 
sors and  assigns  forever,  subject  to  any  liens  or  encumbrances 
of  recognized  priority  (all  of  which  so  far  as  practicable  should 
be  specified  so  as  to  preclude  avoidable  disappointments  and 
controversies),4  in  trust  for  the  equal  and  proportionate  benefit 
of  the  holders  of  the  bonds  whenever  the  same  be  issued. 

III.    The  Conditions  Governing  the  Issue  of  the  Bonds 

A  most  important  point  here  to  be  covered,  of  course,  is  the 
amount  of  the  issue  which  is  authorized  to  be  secured  by  the 
mortgage.  Usually  the  amount  is  limited  by  definite  state- 
ment of  amount,  but  it  may  be  unlimited  (securing  all  future 
advances  represented  by  the  issue  of  the  bonds),  or  it  may  be 
limited  only  by  the  prescription  of  a  ratio  to  the  capital  stock 
from  time  to  time  outstanding,  or  even  by  some  stated  relation 
to  the  earnings  applicable  to  the  payment  of  interest. 

The  mortgage  of  the  Chicago  City  Railway  Company  pre- 
pared in  1907  is  an  unlimited  mortgage,  but  the  use  of  the 
bonds  and  of  their  proceeds  is  carefully  restricted  to  capital  pur- 
poses under  the  direction  of  public  authorities.  The  mortgage 
of  the  New  York  Central  of  1913,  and  of  the  Northern  Pacific 
of  1914,  are  mortgages  unlimited  by  specification  of  amount, 
but  subject  to  the  requirement  of  a  fixed  relation  to  the  capital 

1  Memphis  &  Little  Rock  R.  R.  Co.  v.  Commissioners,  112  U.  S.  609;   1884. 
1  See  Allen  v.  Dallas  &  Wichita  R.  R.,  3  Woods  316 ;   1878.    Atlantic  Trust 
Co.  v.  Dana,  128  Fed.  Rep.  209 ;    1903. 

3  Dow  v.  Memphis  R.  R.  Co.,  124  U.  S.  652  ;   1887.         ' 

4  Central  Trust  Co.  v.  C.  H.  V.  <fc  T.  Ry.,  87  Fed.  815 ;    1898. 

D 


34     PREPARATION  OF  CORPORATE  BONDS,  MORTGAGES 

stock  from  time  to  time  outstanding.  The  unlimited  mortgage 
is  the  outgrowth  of  the  realization  of  the  fact  that  it  is  almost 
impossible  to  forecast  the  possible  growth  and  demands  of  a 
railroad  system.  The  general  mortgages  made  at  the  time  of 
the  reorganizations  of  twenty  years  ago,  then  considered  ample, 
have  proved  inadequate  in  amount  and  in  flexibility. 

Specification  also  should  be  made  in  the  indenture  as  to  any 
variations  in  the  recited  form  of  the  bonds  which  may  be  per- 
mitted under  the  indenture  —  that  is,  as  to  denominations, 
rates  of  interest  of  various  series,  conversion  privileges,  re- 
demption rights,  etc.,  and  also  by  whom  the  bonds  may  be 
executed. 

The  amount  and  character  of  the  bonds  being  specified,  the 
provisions  next  in  order  and  which  require  more  careful  con- 
sideration than  any  other,  are  those  for  the  issue  of  the  bonds. 
Questions  continually  arise  between  mortgagor  corporations 
and  trustees  as  to  their  relative  rights  and  duties  in  respect 
of  such  issue.  It  is  the  aim  of  counsel  of  trustees,  and  should 
be  the  desire  of  counsel  of  mortgagors,  to  specify  clearly  all 
conditions  upon  which  bonds  may  be  issued.  The  trust  com- 
panies desire  to  expedite  the  business  of  their  customers, 
but  the  liabilities  they  may  incur  by  unauthorized  acts  in- 
creasing the  mortgage  debt  are  so  enormous  in  the  aggregate 
that  in  many  cases  prudent  trust  officers  are  compelled  to 
take  deliberate  advice  of  counsel  with  resultant  expense  which 
might  have  been  avoided  had  the  indenture  been  more  definite. 

The  determination  of  the  conditions  upon  which  bonds  may 
be  issued  depends  solely  upon  practical  considerations — that 
is  to  say,  the  marketability  of  the  bonds.  Of  course,  it  is  im- 
practicable to  indicate  even  generally  the  variety  possible  in 
respect  of  such  restrictions.  The  most  that  can  be  presented 
is  an  outline  of  conditions  which  at  the  present  time  are  desir- 
able in  respect  of  bond  issues  intended  for  general  circulation. 

In  most  cases,  the  mortgage  provides  for  the  issue  forth- 
with of  a  specified  amount  of  bonds  upon  merely  the  order  of 


COLLATERAL  TRUSTS  AND  DEBENTURE  INDENTURES  35 

the  company,  sometimes  to  be  accounted  for  by  the  company 
before  any  further  issue.  The  remainder  of  the  bonds  are  re- 
served for  future  use  for  specified  purposes.  Comprehensively 
speaking,  these  purposes  are  to  provide  for  the  refunding  or  pay- 
ment of  prior  liens  and  for  the  acquisition  of  additional  property. 
The  orderly  practice  is  to  reserve  by  separate  sections  the  amount 
required  for  refunding  and  the  amount  issuable  for  additions, 
in  each  case  specifying  the  restrictions  and  the  conditions  appli- 
cable to  such  issue.  In  such  specification,  detail  and  precision 
are  necessary,  and  any  matters  of  fact  should  be  established  by 
certificates  and  affidavits  made  by  officers  of  the  company  or 
other  persons  having  knowledge  in  the  premises,  and  filed  with 
the  trustee.  The  mortgage  should  provide  expressly  that  all 
such  writings  shall  be  conclusive  in  establishing  the  matters 
therein  stated  in  favor  of  the  trustee  as  against  the  bondholders 
and  all  others.  Without  incurring  expense  which  the  mortgagor 
would  be  quite  unwilling  to  pay,  it  would  be  impossible  for  a 
trustee  to  make  separate  in vestigation  of  the  many  requisite  mat- 
ters of  fact.  If  any  questions  of  law  are  to  be  determined,  the 
mortgage  should  provide  for  the  furnishing  of  the  written 
opinion  of  counsel,  also  to  be  filed  with  the  trustee.  In  the 
case  of  large  corporations  having  legal  counsel  of  recognized 
capacity,  it  is  usual  to  specify  that  such  opinion  may  be  that  of 
the  counsel  for  the  company ;  but  if  this  be  desired,  express  au- 
thority should  be  conferred  on  the  trustee  to  receive  such  opinion. 
Some  of  the  legal  questions  to  be  determined  in  connection  with 
bond  issues  are  the  necessity  of  authorizations  by  governmental 
commissions,  the  sufficiency  of  conveyances  of  any  property, 
and  the  effective  attaching  of  the  lien  of  the  mortgage  upon 
new  property. 

As  to  the  bonds  to  be  issued  for  refunding,  the  general  prac- 
tice is  to  provide  that  the  refunded  bonds  be  delivered  to  the 
trustee,  and,  if  so  desired,  that  the  same  shall  be  kept  alive  so 
far  as  legally  practicable,  and  also  that  the  new  bonds  be  issued 
in  exchange  for  such  deposited  bonds.  To  avoid  any  question 


36    PREPARATION  OF  CORPORATE  BONDS,  MORTGAGES 

in  the  premises,  the  authority  to  the  trustee  to  receive  such 
refunded  bonds  should  in  terms  provide  that  the  same  may  be 
before,  at  or  after  maturity,  and  may  be  either  canceled  or  un- 
canceled.  It  is  usual,  also,  to  provide  that  within  a  limited 
period  prior  to  the  maturity  of  an  underlying  bond  issue,  the 
mortgagor  may  receive  refunding  bonds  for  the  purpose  of 
sale,  provided  the  face  (or  other)  value  be  deposited  with 
the  trustee,  to  be  withdrawn  from  time  to  time  upon  the 
deposit  of  the  refunded  bonds.  If  canceled  bonds  are  to 
be  received,  there  should  be  a  requirement  that  evidence  be 
presented  that  no  bond  in  lieu  thereof  has  been  issued  and  is 
outstanding. 

As  to  the  issue  of  the  bonds  reserved  for  additions,  there  has 
been  a  considerable  variation  during  the  past  twenty  years  in 
the  attitude  of  the  investment  market.  In  the  reorganization 
mortgages  of  twenty  years  ago,  the  usual  provision  was  for  the 
issue  of  a  comparatively  small  amount  of  the  bonds  in  each 
calendar  year,  the  object  being  to  prevent  sudden  increase 
of  fixed  charges.  The  additional  bonds  were  not  issuable 
until  the  bonds  previously  issued  had  been  applied  to  improve- 
ments as  established  by  certificates  of  officers  of  the  mortgagor. 
The  rapid  growth  of  the  railroads  made  these  provisions  inade- 
quate, and  during  a  few  years  prior  to  1907,  mortgages  often 
provided  for  the  issue  of  a  substantial  amount  of  bonds  to  be 
reserved  in  the  hands  of  the  company  itself  for  use  for  im- 
provements, and  permitted  additional  bonds  to  be  issued  at 
any  time  as  fast  as  previous  issues  had  been  used  up. 

Following  1907,  however,  the  requirements  of  the  bond- 
buying  houses  and  institutions  became  more  exacting,  and  the 
usual  provision  now  is  that  no  bonds  shall  be  issued  under  the 
mortgage  except  to  reimburse  the  company  for  moneys  actually 
expended,  unless  the  proceeds  of  the  bonds  be  deposited  with 
the  trustee  to  be  withdrawn  from  time  to  time  for  immediate 
expenditure  by  the  company  for  capital  purposes  authorized 
by  the  mortgage.  The  rate  at  which  the  bonds  are  to  be  issu- 


COLLATERAL  TRUSTS  AND  DEBENTURE  INDENTURES  37 

able  to  reimburse  the  company,  may  be  either  their  face  value 
or  a  specified  percentage  of  their  face  value,  and  the  same 
rule  applies  to  the  amount  of  money  deposited  with  the  trustee 
upon  the  issue  of  bonds. 

In  many  cases,  especially  those  of  industrial  corporations, 
the  requirement  is  that  bonds  shall  be  issued  only  to  the  extent 
of  75  per  cent  or  80  per  cent  of  the  cost  of  improvements,  re- 
quiring the  company  to  make  up  the  deficiency  out  of  its 
general  funds. 

The  expenditures  by  the  company  for  which  bonds  or  their 
proceeds  may  be  used  are  established  by  certificates  made  by 
competent  persons  and  filed  with  the  trustee.  These  certifi- 
cates are  required  to  contain  statements  identifying  the  prop- 
erty affected  and  indicating  that  the  expenditures  are  for  the 
purposes  chargeable  strictly  to  capital  account. 

The  provisions  for  the  issue  of  the  bonds  should  be  in  detail 
as  to  both  coupon  bonds  and  registered  bonds  and  their  inter- 
change, and  they  should  be  such  as  to  permit  of  the  issue  of 
registered  bonds  as  such  originally  and  without  necessity  of 
interchange.  They  should  permit  also  the  transfer  of  regis- 
tered bonds. 

There  should  be  provisions  also  for  the  issue  of  new  bonds  in 
place  of  bonds  mutilated  or  destroyed,  or  of  registered  bonds 
lost.  Considerable  danger  attends  the  issue  of  new  bonds  for 
coupon  bonds  claimed  to  be  lost,  and  usually  it  is  better  as  it 
is  safer  to  put  a  claimant  for  such  a  bond  to  his  proof  by  a  legal 
proceeding.  An  illustration  of  the  attitude  of  the  courts  toward 
such  claimants  is  indicated  by  the  decision  of  Switzer  and  Co.  v. 
N.  Y.  Central  Co.1 

In  view  of  the  care  and  time  required  for  the  preparation  of 
engraved  definite  bonds,  it  is  a  matter  of  practical  convenience 
to  provide  in  the  mortgage  for  the  issue  of  a  temporary  bond 
or  bonds  in  typewritten  or  printed  form  of  large  denomination, 
to  be  exchangeable  for  the  definitive  bonds  when  prepared. 

1  152  App.  Div.  (N.  Y.)  70 ;   1912. 


38    PREPARATION  OF  CORPORATE  BONDS,  MORTGAGES 

IV.   Particular  Covenants  of  the  Mortgagor 

The  mortgage  should  contain  a  covenant  to  pay  the  principal 
and  interest  of  the  bonds,  in  substance  corresponding  to  the 
similar  covenant  in  the  bonds,  but  subject  to  the  provisions  of 
the  mortgage.  A  breach  of  the  covenant  to  pay  thus  will 
constitute  a  breach  of  the  covenant  in  each  instrument:  as 
either  breach  will  create  a  right  of  action  in  personam  either 
may  be  enforced.1  In  many  of  the  large  mortgages  made  within 
the  last  year  or  two,  there  is  inserted  in  this  covenant  a  provi- 
sion for  the  protection  of  the  company,  against  liability  under 
the  income  tax  law,  authorizing  it  to  require  persons  entitled 
to  interest  to  furnish  proper  certificates  in  compliance  with  the 
terms  of  that  law. 

Another  covenant  proper  for  all  mortgages  is  that  to  execute 
further  assurances,  and  to  obtain  further  assurances  from  others 
obligated  to  the  company  to  make  conveyance. 

In  mortgages  covering  limited  parcels  of  real  estate,  there  is 
usually  inserted  a  covenant  as  to  title  and  freedom  from  encum- 
brances except  as  specified. 

If  the  place  of  payment  of  the  principal  and  interest  of  the 
bonds  is  stated  in  general  terms  as  being  the  office  or  agency 
of  the  company,  there  should  be  a  covenant  in  the  mortgage  to 
maintain  such  an  agency  at  the  place  stated. 

If  the  bonds  are  subject  to  registration,  a  covenant  should 
be  included  to  maintain  books  at  the  office  or  agency  in  which 
such  registration  may  be  made  under  reasonable  regulations 
and  where  transfer  of  registered  bonds  similarly  may  be  made. 
Where  a  new  bond  is  issuable  upon  any  transfer  or  interchange, 
a  nominal  charge,  usually  one  dollar,  is  made  by  the  company 
to  cover  the  expense,  in  addition  to  the  amount  of  any  revenue 
stamp  chargeable  against  the  transferer. 

It  is  customary  in  all  mortgages  to  include  a  covenant  to 
maintain  in  good  condition  the  mortgaged  premises,  and  in  rail- 

1  See  Hulbert  v.  Clark,  57  Hun.  (N.  Y.)  558 ;   1890. ' 


COLLATERAL  TRUSTS  AND  DEBENTURE  INDENTURES  39 

road  mortgages  a  covenant  to  keep  in  proper  repair  all  equip- 
ment and  to  replace  it  when  worn  out  or  otherwise  disposed  of, 
and  also  to  keep  a  record  of  all  rolling  stock  and  to  permit  it  to 
be  inspected  by  the  trustee. 

Other  general  provisions  are  those  to  pay  taxes  and  assess- 
ments (subject,  however,  to  the  right  of  the  company  to  test 
the  legality  thereof),  to  maintain  the  priority  of  the  mortgage 
lien,  and  to  discharge  claims  of  mechanics,  laborers  and  others. 

Besides  these  there  are  the  covenants  to  apply  proceeds  of 
bonds  only  as  authorized  by  the  mortgage,  and  to  record  the  in- 
denture and  to  pay  any  recording  tax,  the  trustee  usually  being 
discharged  from  any  and  all  responsibility  to  cause  the  record 
to  be  made. 

V.  Provisions  as  to  Pledged  Stocks  and  Bonds 

Provisions  as  to  pledged  stocks  and  bonds  of  course  are  ap- 
propriate only  in  an  indenture  in  which  the  security  in  whole 
or  in  part  consists,  or  may  consist,  of  such  property;  but  the 
number  of  large  corporate  mortgages  which  include  such  securi- 
ties is  far  greater  than  of  those  which  do  not.  The  points  neces- 
sary to  be  considered  in  connection  with  such  pledges  will  be 
discussed  in  the  paper  upon  Collateral  Trusts. 

The  principal  interest  of  the  pledger  is  to  reserve  until  de- 
fault the  right  to  collect  the  income  and  to  exercise  the  other 
rights  of  an  owner  of  the  pledged  securities.  This  is  accom- 
plished by  express  provision  to  that  effect,  and  by  the  further 
provision  sometimes  that  until  default  no  transfer  shall  be  made 
upon  the  corporation  books  of  the  shares  for  which  the  certifi- 
cates indorsed  for  transfer  by  the  pledger  are  delivered  to  the 
trustee,  and  sometimes  that  the  trustee  may  transfer  the  same 
to  itself  or  its  nominee  either  immediately  or  when  it  deems 
proper.  In  case  of  such  transfer  of  stock  it  is  usually  stipulated 
that  from  tune  to  time  when  and  as  requested  prior  to  default 
the  trustee  shall  give  to  the  pledger  a  proper  proxy  to  vote 
thereon  except  as  expressly  limited. 


40    PREPARATION  OF  CORPORATE  BONDS,  MORTGAGES 

VI.   Remedies  of  Trustees  and  of  Bondholders 

Under  this  head  we  may  consider  the  defaults  in  respect  of 
which  the  remedies  may  be  invoked,  particularly  the  three  prin- 
cipal remedies :  (1)  the  right  to  declare  the  principal  due,  (2)  the 
right  of  entry  either  by  the  trustee  or  a  receiver,  and  (3)  the 
right  of  foreclosure  and  sale  either  with  or  without  suit. 

Among  the  usual  defaults  are  (a)  default  in  the  payment  of 
principal  of  any  of  the  bonds  when  the  same  shall  have  become 
due  whether  at  maturity,  or  prior  thereto  by  declaration  or 
otherwise,  (6)  default  in  the  payment  of  any  interest  on  any 
bond,  (c)  default  in  the  observance  of  any  other  important 
covenants  in  the  mortgage,  such  as  sinking  fund  obligations, 
rentals  or  taxes  affecting  valuable  parts  of  the  mortgaged 
premises,  and  (d)  default  in  payment  of  principal  or  interest  of 
underlying  bonds. 

In  case  of  defaults,  other  than  a  default  in  payment  of  the 
principal  of  a  bond,  it  is  usual  to  allow  to  the  mortgagor  a 
period  of  grace.  In  the  case  of  railroads  this  period  of  grace 
generally  is  six  months  and  in  cases  of  other  companies  thirty 
or  sixty  or  ninety  days  from  the  date  of  default,  notice  thereof 
not  being  required.  Defaults  in  the  due  observance  of  other 
covenants  of  the  indenture  usually  are  penalized  only  after  the 
expiration  of  a  specified  period  initiated  by  written  notice  of  the 
default  to  the  mortgagor  given  by  the  trustee  or  the  bond- 
holders—  the  purpose  of  this  provision  being  to  require  ob- 
servance of  all  the  covenants,  without  subjecting  the  company 
to  irrevocable  penalty  for  remediable  defaults  unless  the  trustee 
or  the  bondholders  shall  have  deemed  the  same  of  sufficient 
consequence  to  give  such  notice. 

A  general  remedy  given  to  the  trustee  of  mortgaged  realty, 
and  one  which  is  a  survival  of  the  earliest  days,  is  the  right  to 
enter  and  to  operate  for  the  benefit  of  the  bondholders.  This 
provision  rarely,  if  ever,  is  availed  of  at  the  present  time,  be- 
cause of  the  laws  of  the  several  States  restrictive  of  the  rights 


COLLATERAL  TRUSTS  AND  DEBENTURE  INDENTURES  41 

therein  of  foreign  corporations,  as  well  as  because  of  the  liabili- 
ties which  the  trustee  might  incur  through  such  entry;  but 
the  provision  should  always  be  phrased  in  optional  form.  It 
affords  a  basis  for  the  appointment  of  a  mortgage  receiver  to 
collect  the  income  and  to  apply  the  net  to  the  amounts  due  on 
the  bonds.  In  special  cases,  there  has  been  inserted  a  provi- 
sion that  a  trustee  might  cause  to  be  organized  a  corporation 
to  operate  a  property  of  which  the  trustee  might  deem  it  desir- 
able to  take  possession. 

Another  remedy  which  has  come  down  from  the  early  real 
property  mortgages  is  that  authorizing  the  trustee  itself  to  sell 
the  mortgaged  premises  without  judicial  foreclosure.  This 
ancient  right  is  now  limited  in  many  of  the  States  and  involves 
so  many  questions  of  procedure  that  it  seldom  is  exercised  with 
respect  to  realty.  It  is  availed  of  frequently  at  the  present 
time,  however,  to  effect  sales  of  pledged  securities  by  the 
trustee  in  the  same  manner  as  pledged  securities  are  sold  in 
enforcement  of  ordinary  collateral  notes  by  the  banks. 

Of  course,  the  mortgage  also  will  authorize  the  enforcement 
of  the  security  by  foreclosure  or  other  legal  proceedings. 

As  to  pledged  stocks  and  bonds,  it  is  proper  to  empower  the 
trustee  in  an  event  of  default  or  of  receivership,  to  terminate 
the  right  of  the  company  to  collect  the  income  of  pledged 
stocks  and  bonds,  or  to  vote  in  respect  of  the  stocks. 

The  mortgage  should  specify  that  it  is  the  duty  of  the  trustee 
upon  request  of  the  holders  of  a  prescribed  amount  of  bonds 
and  upon  receiving  indemnity  to  enforce  the  provisions  of  the 
indenture  in  such  manner  as  may  be  advised  by  counsel. 

To  prevent  annoyance  or  damage  by  any  litigious  holder  of 
a  few  bonds  against  the  interest  of  the  holders  generally, 
through  involving  the  trustee  of  the  company  in  litigation  in 
respect  of  the  bonds  or  indenture,  it  is  customary  to  pro- 
vide that  a  trustee  shall  not  be  required  to  take  any  action 
unless  requested  so  to  do  by  the  holders  of  a  substantial  amount 
of  the  bonds,  usually  10  per  cent  to  25  per  cent. 


42    PREPARATION  OF  CORPORATE  BONDS,  MORTGAGES 

Another  very  desirable  provision  gives  to  the  trustee  the 
right  at  its  option  to  act  upon  an  event  of  default  without 
awaiting  any  period  of  grace,  in  case  the  company  shall  be  put 
in  the  hands  of  a  receiver  at  the  suit  of  any  one  other  than  the 
trustee.  In  cases  of  commercial  corporations,  the  mortgage 
security  may  be  impaired  if  the  company  be  left  in  the  custody 
of  a  receiver  for  unsecured  creditors,  during  the  substantial 
period  pending  the  termination  of  a  period  of  grace.  If  the 
trustee  is  authorized  to  act  promptly,  it  may  have  the  receiver- 
ship extended  to  the  mortgaged  property  for  its  benefit  and  its 
protection. 

In  discussing  the  form  of  the  bond,  much  attention  was  given 
to  the  mode  of  providing  therein  for  the  acceleration  of  the 
maturity  of  the  principal  of  the  debt  in  case  of  defaults,  es- 
pecially a  continuing  default  in  payment  of  interest.  This 
right,  of  great  importance  to  the  trustee  and  the  bondholders, 
should  be  conferred  also  in  the  mortgage  with  particular  care. 
The  method  and  the  effect  of  foreclosing  for  any  default  except 
in  payment  of  principal  are  vague  and  unsatisfactory.  Unless 
the  principal  can  be  made  to  become  due  upon  such  a  default, 
effective  enforcement  of  the  mortgage  will  be  impracticable. 
Usually,  this  right  is  made  exercisable  by  the  trustee  either  in 
its  discretion,  or  pursuant  to  the  mandatory  request  of  the 
holders  of  a  specified  amount  of  bonds.  Without  such  speci- 
fication the  request  of  bondholders  might  have  to  be  by  all.1 
Such  a  right  of  declaration  should  be  accompanied  by  the  cor- 
responding right  of  the  holder  of  at  least  a  majority  of  the 
bonds  to  waive  the  declaration  and  its  consequences,  without 
prejudice  however  to  any  other  right  of  the  trustee  or  the 
bondholders,  or  to  the  right  of  future  declarations,  thus  avoid- 
ing the  rule  in  Dumpor's  case 2  that  a  condition  once  waived  is 
lost  forever. 

It  should  be  provided  also  that  in  case  of  sale  of  the  property 

*  See  Mallory  v.  W.  S.  R.  R.  Co.,  35  Superior  Rep.  (N.  Y.)  174 ;   1873. 
»  See  4  Coke's  Rep.  119  b ;  1602. 


X 

COLLATERAL  TRUSTS  AND  DEBENTURE  INDENTURES  43 

for  any  cause  either  under  the  mortgage,  or  under  any  claim 
having  priority  thereto,  the  principal  sum  should  become  due 
forthwith  without  any  further  action. 

Usually  it  is  desirable  that  the  entire  mortgaged  premises 
be  sold  in  one  parcel  and  as  an  entirety,  and  provision  to  that 
effect  should  be  inserted  in  the  mortgage,  subject  of  course  to 
other  direction  by  bondholders  or  to  the  requirement  of  statutes. 

The  character  of  notice  to  be  given  of  the  time  and  place  of 
any  sale  should  be  prescribed,  and  power  should  be  given  to 
the  person  conducting  the  sale  to  adjourn  the  same  to  an  ap- 
pointed time  at  the  same  place  without  further  notice  or  pub- 
lication. 

The  trustee  should  have  power  to  execute  and  to  deliver  to 
the  purchasers  upon  such  sale  suitable  conveyances,  and  the 
mortgage  should  contain  a  power  of  attorney  from  the  mortgagor 
to  execute  such  conveyances,  and  properly  also  a  provision  that 
if  requested  by  the  trustee  the  mortgagor  itself  will  join  in  the 
execution. 

The  receipt  of  the  trustee  for  the  purchase  money  should 
be  made  a  sufficient  discharge  therefor  to  the  purchaser,  and 
such  purchaser  should  not  be  bound  to  inquire  as  to  the  use 
or  the  application  of  the  proceeds  or  the  necessity  of  the  sale. 

Provision  should  be  made  to  govern  the  order  in  which  the 
proceeds  of  sale  should  be  distributed. 

It  is  important  here  to  provide  against  acts  by  the  mortgagor 
which  would  avoid  the  due  payment  of  coupons  and  result  in 
their  being  kept  alive  and  entitled  to  the  prior  or  equal  security 
of  the  mortgage,  thus  increasing  the  debt  in  case  of  foreclosure.1 

The  mortgage  should  provide  that  any  such  coupons  so  kept 
alive  shall  not  be  entitled  to  the  security  or  to  any  share  of  the 
proceeds  of  sale  except  subject  to  the  payment  of  the  principal 
and  of  all  coupons  not  so  funded. 

1  See  Ketchum  v.  Duncan,  96  U.  S.  659 ;  1877 ;  Wood  v.  Guarantee  Trust 
Co.,  128  U.  S.  416;  1888;  Morgan's  Co.  v.  Texas  Cent.  Ry.,  137  U.  S.  171-196; 
1890. 


44    PREPARATION  OF  CORPORATE  BONDS,  MORTGAGES 

It  is  usual  for  the  mortgagor  to  authorize  the  bondholders  to 
purchase  without  accountability  except  for  the  purchase  price, 
and  on  account  of  the  purchase  price  to  use  any  bonds  or  interest 
obligations  to  the  extent  of  the  amount  payable  upon  them  out 
of  the  proceeds  of  sale. 

A  covenant  usual  in  the  modern  mortgage  is  that  the  mort- 
gagor will  pay  the  principal  and  the  interest  of  the  bonds  to 
the  trustee  as  trustee  of  an  express  trust ;  and  that  the  trustee 
shall  have  the  right  to  recover  judgment  therefor  either  before 
or  after  or  during  the  pendency  of  foreclosure  proceedings. 
These  provisions  may  support  a  claim  by  the  trustee  to  recover 
a  deficiency  judgment  in  jurisdictions  where  deficiency  judg- 
ments are  allowable.1 

As  a  precaution  against  unforeseen  contingencies,  there  is 
oftentimes  inserted  in  mortgages  a  provision  (of  doubted  legality) 
authorizing  the  mortgagor,  prior  to  default,  to  surrender  pos- 
session to  the  trustee  and  consenting  to  the  appointment  of  a 
receiver.  Such  a  provision  might  be  useful  in  case  of  unjusti- 
fiable or  predatory  attempts  to  interfere  with  the  exercise  of  the 
corporate  powers. 

In  connection  with  the  enforcement  of  the  remedies  of  the 
trustee,  the  mortgage  should  provide  specifically  that  the 
mortgagor  waives  its  rights  under  any  stay  or  extension  law 
providing  for  valuation  or  appraisement  or  other  postponement 
of  the  right  of  enforcement,  and  should  contain  an  express 
waiver  of  the  benefit  of  stay,  extension,  valuation  and  appraise- 
ment laws,  and  of  any  statutory  right  of  redemption  after  a 
sale  in  enforcement  of  the  mortgage.  Even  if  at  the  time  of  the 
mortgage  there  be  no  such  statutes  in  force,  they  may  be  made 
the  subject  of  later  enactment. 

1  An  interesting  review  by  Judge  EARL,  of  the  right  to  judgment  for  defi- 
ciency will  be  found  in  Frank  v.  Davis,  135  N.  Y.  275 ;  1892. 

See  U.  S.  Sup.  Ct.  Equity  Rule  10 ;  Noonan  v.  Lee,  2  Black  499 ;  1862 ; 
Mackay  v.  Randolph  Macon  Co.,  178  Fed.  Rep.  881 ;  1910;  Watson  v.  C.  R.  I. 
&  P.  R.  R.  Co.,  169  App.  Div.  (N.  Y.)  663 ;  1915 ;  Grant  v.  Winona  &  S.  W. 
By.  Co.,  85  Minn.  422 ;  1902 ;  89  N.  W.  60 ;  1902. 


COLLATERAL  TRUSTS  AND  DEBENTURE  INDENTURES  45 

Remedies  frequently  specified  in  important  mortgages  are 
the  right  of  the  trustee  to  obtain  the  appointment  of  a  re- 
ceiver of  the  mortgaged  premises,  the  right  of  the  company 
to  deliver  possession  to  the  trustee  prior  to  default,  and  the 
right  of  the  trustee  to  maintain  suits  against  impairment  of  the 
security  by  governmental  authorities  under  unconstitutional 
legislation. 

It  is  usual  to  provide  that  no  delay  or  omission  of  the  trustee 
shall  be  construed  as  a  waiver,  or  a  default,  or  an  acquiescence. 

The  provision  that  all  remedies  shall  be  cumulative  and  not 
exclusive,  but  additional  to  any  others  given  by  law,  has  been 
considered  already  in  discussing  the  very  recent  case,  Watson  v. 
C.  R.  I.  &  P.  R.  R,1  hereinafter  examined. 

The  provision  as  to  cumulative  remedies  probably  was  intro- 
duced originally  to  obtain  or  to  save  for  the  trustee  a  right  to 
sue  at  law  for  the  debt,  concurrently  with  a  suit  to  foreclose 
the  mortgage  or  pledge,  except  where  there  may  be  statutory 
requirement  of  leave  of  the  court,2  and  also  to  avoid  any  impli- 
cation that  conditions  affecting  one  of  the  trustee's  remedies, 
such  as  foreclosure  by  advertisement,  affected  his  right  also  as 
to  a  distinct  and  unconditional  remedy  such  as  foreclosure  by 
suit.3 

In  connection  with  the  statement  of  remedies,  it  should  be 
provided  that  no  holder  of  any  bond  or  coupon  shall  have  a 
right  to  institute  proceedings  under  the  indenture  for  any  pur- 
pose whatsoever  unless  first  he  shall  have  given  notice  to  the 
trustee  and  shall  have  afforded  to  the  trustee  reasonable  oppor- 
tunity to  enforce  such  provision  of  the  indenture,  and  shall 
have  indemnified  the  trustee,  nor  unless  the  holders  of  a  speci- 
fied amount  of  bonds  shall  have  joined  with  him  in  demanding 
such  action.  This  requirement,  however,  would  not  be  opera- 
tive in  any  case  where  it  would  bar  the  bondholder  of  his  just 

1  169  App.  Div.  (N.  Y.)  663 ;  1915. 

2  See  Vanderbilt  v.  Schreyer,  91  N.  Y,  392 ;  1883 ;  Robert  v.  Kidansky,  111 
App.  Div.  (N.  Y.)  475 ;   1906. 

Morgan's  Co.  v.  Texas  Central  Ry.  Co.,  137  U.  S.  171-192 ;  1890. 


46     PREPARATION  OF  CORPORATE  BONDS,  MORTGAGES 

and  equitable  rights  as  in  case  of  unjustifiable  refusal  or  neg- 
lect by  the  trustee,  or  where  the  trustee,  or  others  acting  in 
behalf  of  the  trustee  or  of  the  mortgagor,  hold  so  many  of  the 
bonds  as  to  render  it  impossible  for  the  aggrieved  bondholder 
to  obtain  support  in  the  specified  amount.  The  trust  relation 
of  the  bondholders  inter  sese  would  restrict  inequitable  oppres- 
sion of  the  minority.1 

In  the  frequently  mentioned  recent  case  of  Watson  v.  C.  R.  I. 
&  P.  Ry.,2  the  question  was  presented  as  to  the  effect  of  these 
and  similar  provisions,  upon  the  right  of  a  bondholder  to  obtain 
judgment  on  his  bond  with  the  view  of  reaching  property  not 
covered  by  the  mortgage  or  pledge,  which  contained  special 
provisions  authorizing  the  trustee  not  only  to  declare  the  prin- 
cipal due,  but  also  as  trustee  of  an  express  trust  to  recover 
judgment  for  the  entire  principal  of  all  the  bonds  then  out- 
standing, together  with  all  interest  in  default,  and  to  sell  there- 
under the  property  mortgaged  or  pledged,  and,  in  the  event  of 
deficiency,  to  enter  judgment  therefor.  All  of  these  steps 
having  been  taken  by  the  trustee,  the  holder  of  one  bond 
brought  action  at  law  in  the  City  Court  and  obtained  judgment 
which  was  reversed  by  the  Appellate  Term,  and  the  reversal 
was  sustained  by  the  Appellate  Division,  where  two  opinions 
were  delivered.  That  of  the  Court  by  Mr.  Justice  Clarke, 
seems  to  rest  upon  the  fact  that  the  trustee  had  acted.  He 
says,  "  I  am  satisfied  that,  the  trustee  having  acted,  no  independ- 
ent action  by  a  bondholder  can  be  maintained."  But  what  if 
the  trustee  had  not  acted  ?  In  his  separate  though  concurring 
opinion,  Presiding  Justice  Ingraham  took  a  different  and  some- 
what wider  view,  seeming  to  have  regard  to  the  essential  equality 
of  right  in  all  bondholders,  which  equality  would  be  violated 
by  allowing  one  bondholder  in  his  own  separate  right  to  recover 
a  judgment  enforcible  against  property  of  the  mortgagor  even 

1Linder  v.  Hartwell  R.  Co.,  73  Fed.,  320;   1896;  Cochranv.  Pittsburgh  Co., 
150  Fed.,  682 ;  1907 ;  Ettlinger  v.  Persian  Rug  &  C.  Co.,  142  N.  Y.,  1891 ;  1894. 
2 169  App.  Div.  N.  Y.  663  ;  1915. 


COLLATERAL  TRUSTS  AND  DEBENTURE  INDENTURES  47 

though  not  covered  by  the  mortgage.  This  would  operate  to 
the  prejudice  of  other  bondholders  relying  upon,  and  acting 
by,  their  common  representative,  the  trustee.  Similar  con- 
sideration of  the  equality  of  right  and  duty  of  co-bondholders 
inter  sese  was  indicated  in  Gue  v.  Canal  Co.,1  by  Chief  Justice 
Taney  who  said,  "  It  would  be  against  the  principles  of  equity 
to  allow  a  single  creditor  to  destroy  a  fund  to  which  other 
creditors  had  a  right  to  look  for  payment" ;  in  Pennock  v.  Coe,2 
by  Mr.  Justice  Nelson,  who  said,  "To  permit  therefore  one 
of  the  bondholders  under  the  second  mortgage  to  proceed  at 
law  in  the  collection  of  his  debt  upon  execution  would  .  .  . 
disturb  the  pro  rata  distribution  in  case  of  a  deficiency  and 
give  him  an  inequitable  preference  over  his  associates";  and 
in  Jackson  v.  Ludeling,3  by  Mr.  Justice  Strong,  who  held  for 
the  Court  that,  "When  two  or  more  persons  have  a  common 
interest  in  a  security,  equity  will  not  allow  one  to  appropriate 
it  exclusively  to  himself,  nor  to  impair  its  worth  to  others." 
It  is  common  knowledge  that  seizure  under  execution  of  rail- 
road property  not  covered  by  a  mortgage  impairs  the  worth 
of  the  mortgaged  railroad  to  the  bondholders,  and  no  one  of 
them  should  be  allowed  thus  selfishly  to  injure  those  with 
whom  he  has  entered  into  a  trust  relationship. 

The  principle  recognized  in  these  decisions  of  our  highest 
court  and  challenged  in  this  latest  action  should  be  protected 
in  express  terms,  and  it  might  be  proper  to  provide  that 
no  bondholder  proceeding  thus  separately  at  law  for  his  own 
benefit,  should  be  entitled  to  share  in  the  proceeds  of  the 
property  covered  by  the  mortgage  or  pledge ;  certainly  not  in 
any  way  that  should  give  him  an  advantage  over  his  fellow 
bondholders. 

The  provisions  of  the  mortgage  being  for  the  benefit  of  the 
trustee  and  the  bondholders  on  the  one  part,  and  of  the  mort- 
gagor company  on  the  other  part,  grave  difficulties  might  arise 

1  24  How.  (U.  S.)  263  ;  1860.        2  23  How.  (U.  S.)  117 ;  1859. 
3  21  Wall.  (U.  S.)  616  ;  1874. 


48    PREPARATION  OF  CORPORATE  BONDS,  MORTGAGES 

if  under  any  rule  of  law 1  third  persons  were  invested  with 
any  right  to  claim  that  any  provisions  of  the  mortgage  were 
intended  for  their  benefit.  To  avoid  any  such  contention  or 
any  consequent  enforcement  of  such  a  contention,  the  mortgage 
should  provide  in  express  terms  that  nothing  in  the  indenture 
or  the  bonds  is  intended  to  give  to  any  such  third  persons  any 
rights  whatever,  and  that  the  provisions  of  the  bonds  and 
mortgage  are  solely  for  the  benefit  of  the  parties  thereto  and 
the  holders  of  bonds  thereunder. 

The  draftsman  should  include  in  the  mortgage  (with  concise 
reference  thereto  in  the  bonds)  full  exemption  from  liability  on 
account  of  the  mortgage  debt  on  the  part  of  incorporators, 
stockholders,  officers  and  directors. 

VII.   Releases  and  Leases 

The  points  to  be  covered  in  the  article  concerning  releases 
are  (a)  the  character  and  extent  of  the  property  subject  to 
release;  (6)  the  identification  of  the  specific  parcels  and  the 
ascertainment  of  their  value;  (c)  the  application  of  the  pro- 
ceeds of  released  property ;  and  (d)  the  subjection  to  the  mort- 
gage lien  of  new  property  acquired  with  proceeds  of  releases. 

The  character  and  extent  of  the  property  permitted  to  be 
released  depends  of  course  upon  the  character  of  the  property 
of  the  mortgagor  and  the  nature  of  its  business. 

The  general  provision  is  one  that  the  property  released  shall 
be  such  as  shall  not  be  necessary  or  advantageous  for  the  opera- 
tion, maintenance  or  use  of  the  railroad  or  of  the  manufactur- 
ing plants,  as  the  case  may  be,  and  that  the  release  must  be 
required  for  the  purpose  of  carrying  out  an  agreement  for  the 
sale  of  the  property  to  be  released  or  for  the  exchange  thereof 
for  other  property,  or  as  an  incident  to  some  change  or  modi- 
fication in  right  of  way  or  terminals,  or  in  the  adjustment  of 
boundary  disputes. 

1  Like  that  in  Lawrence  v.  Fox,  20  N.  Y.  269 ;  1859. 


COLLATERAL  TRUSTS  AND  DEBENTURE  INDENTURES  49 

These  facts  should  be  made  the  subject  of  proof  to  the  trustee 
by  a  resolution  of  the  directors  authorizing  the  company  to 
request  the  release  and  a  certificate  of  one  or  more  officers  of 
the  company,  having  knowledge  in  the  premises,  setting  forth 
the  above  facts  concerning  the  property,  as  well  as  a  specific 
description,  and  a  statement  of  the  value,  of  the  property 
affected.  In  the  case  of  railroad  mortgages,  it  is  usual  to 
accept  the  certificate  of  responsible  officers.  In  case  of  manu- 
facturing or  commercial  companies,  the  release  clause  is  further 
limited  by  requiring  that  there  be  furnished  to  the  trustee 
further  proof  through  appraisers  or  examiners  satisfactory  to 
the  trustee. 

Properly  the  proceeds  of  all  released  property  should  be  held 
by  the  trustee,  though  the  mortgage  may  authorize  the  com- 
pany under  proper  safeguards  to  retain  such  moneys  to  be 
applied  by  it  within  a  reasonable  time  for  specified  purposes. 
Obviously  these  purposes  must  be  such  as  shall  protect  the 
security  of  the  debt  either  by  redemption  of  bonds  or  by  en- 
hancing the  value  of  the  mortgaged  property. 

The  mortgage  should  require  that  new  acquisitions  be  con- 
veyed properly  to  the  trustee  as  part  of  the  security,  or  that 
the  trustee  should  be  entitled  to  rely  upon  the  opinion  of 
counsel  that  no  such  conveyance  is  necessary. 

Express  provision  should  be  made  that  the  purchaser  of  re- 
leased property  should  not  be  required  to  see  to  the  application 
of  the  proceeds  or  to  the  necessity  of  release. 

Generally  there  is  reserved  to  the  mortgagor  full  power 
without  notice  to  the  trustee  to  dispose  of  worn-out  machinery 
and  other  chattels  upon  condition  that  the  same  be  replaced 
by  new  property. 

In  mortgages  of  railways,  power  should  be  reserved  to  the 
mortgagor  to  make  changes  or  substitutions  of  trackage  rights, 
agreements  and  contracts  subject  to  the  indenture,  and,  if 
there  be  important  leases  or  contracts  which  are  to  be  subject 
to  no  modification  or  subject  to  modification  only  with  the  con- 


50    PREPARATION  OF  CORPORATE  BONDS,  MORTGAGES 

sent  of  the  trustee,  they  should  be  specifically  excepted  from 
the  general  clause.  In  a  railroad  mortgage,  usually  it  is  desir- 
able to  include  in  the  grant  in  general  terms  all  the  so-called 
"structural  contracts"  in  order  that  in  case  of  foreclosure  the 
entire  property  may  be  taken  over  as  a  going  concern.  Among 
the  contracts  which  would  be  included  in  such  an  omnibus 
clause  undoubtedly  may  be  many  which  are  subject  to  frequent 
change;  and  while  it  is  desirable  to  mortgage  all  these  con- 
tracts it  is  still  more  desirable  that  the  operating  efficiency  of 
the  road  should  not  be  hampered  by  preventing  their  modifi- 
cation. The  railroad  company  also  should  reserve  liberty  to 
make  changes  of  tracks,  terminals,  etc.,  to  meet  the  require- 
ments of  municipal  and  other  governmental  authorities,  even 
though,  because  of  the  absence  of  any  equivalent  property,  the 
changes  may  involve  some  apparent  reduction  in  the  money 
value  of  the  mortgaged  premises. 

The  release  clause  should  provide  for  the  termination  of  the 
mortgagor's  rights  thereunder  in  case  of  default,  subject  to  a 
discretion  and  right  in  the  trustee  to  permit  such  a  release  after 
default  and  even  after  the  company  may  have  passed  into  the 
hands  of  a  receiver.  As  already  considered,  the  value  of  the 
mortgaged  property  as  security  lies  largely  in  its  earning  ca- 
pacity as  a  going  concern,  and  anything  that  impairs  its  suc- 
cessful operation  either  in  the  possession  of  the  mortgagor  or 
of  a  receiver  will  result  in  loss  to  the  holders  of  the  mortgage 
bonds. 

Any  power  to  lease  the  mortgaged  property  or  the  property 
of  any  company  whose  stock  is  pledged  should  provide  that  in 
case  of  foreclosure  and  sale  the  lease  should  be  terminable  at 
the  option  of  the  purchaser. 

VIII.   Consolidations,  Mergers  and  Provisions  Affecting  the 
Mortgagor 

As  most  mortgages  provide  for  the  issuance  from  time  to 
time  of  additional  bonds,  either  those  increasing  the  mortgage 


COLLATERAL  TRUSTS  AND  DEBENTURE  INDENTURES  51 

debt  or  those  issued  upon  interchanges  of  one  form  of  bond  for 
another,  it  is  important  to  anticipate  the  effect  of  the  mort- 
gaged premises  passing  to  another  legal  corporate  entity  as  the 
result  of  a  consolidation  or  a  merger  or  of  a  sale  of  the  premises 
as  an  entirety,  especially  if  the  mortgage  contains  the  usual 
covenant  that  the  mortgagor  company  will  maintain  its  cor- 
porate existence  and  preserve  its  corporate  property.  Upon  a 
strict  merger  under  the  New  York  Stock  Corporation  Law,1 
the  obligations  of  the  merged  company  are  enforcible  only 
against  it,  and  not  against  the  company  into  which  it  is  merged.2 
This  would  seem  to  be  the  case  also  in  respect  of  a  merger  of 
railroad  corporations  under  the  Railroad  Law,3  thus  differing 
in  effect  from  a  merger  of  banking  corporations  under  Sections 
35-40  of  the  Banking  Law.4 

For  market  purposes  all  bonds  of  the  same  series  should  be 
substantially  identical  in  form,  and  therefore  provision  should 
be  made  for  the  issue  of  bonds  in  the  name  of  the  original  cor- 
poration notwithstanding  any  such  loss  of  its  identity. 

A  few  years  since,  in  a  case  where  it  was  proposed  to  consoli- 
date a  railroad  company  but  to  retain  the  right  under  an  exist- 
ing mortgage  to  issue  a  residue  of  bonds,  it  was  decided  that 
prior  to  the  consolidation  the  mortgagor  company  should 
actually  execute  and  have  certified  all  the  unissued  bonds  and 
place  them  in  escrow  for  issue  as  provided  in  the  mortgage.  A 
comparatively  recent  case  has  taken  the  view  that  in  such 
case  the  bonds  could  not  be  issued  by  the  successor.5  This 
cumbrous  procedure  would  have  been  unnecessary  if  the 
indenture  had  contained  a  clause  authorizing  a  successor  cor- 
poration to  issue  bonds  in  the  name  of  the  original  mortgagor. 
This  point  should  be  covered  by  mortgage  provisions  to  the 
effect  fcthat  nothing  therein  contained  should  prevent  any  con- 

1  Sec.  15,  Ch.  61,  N.  Y.  Consolidated  Laws. 

*  Irvine  v.  N.  Y.  Edison  Co.,  207  N.  Y.  425 ;   1913. 

8  Sec.  149,  Ch.  49,  N.  Y.  Consolidated  Laws. 

4  See  Matter  of  Bergdorf,  206  N.  Y.,  309     1912. 

6  See  Diggs  v.  Fidelity  Co.,  75  Atlantic  Rep.  517 ;   1905. 


52    PREPARATION  OF  CORPORATE  BONDS,  MORTGAGES 

solidation  or  merger  or  any  conveyance  or  transfer  of  the 
property  subject  to  the  indenture  as  an  entirety,  provided 
that  the  lien  and  security  shall  not  be  impaired  and  that  the 
successor  corporation  shall  have  assumed  the  payment  of  the 
bonds  and  the  obligations  of  the  indenture.  Upon  such  assump- 
tion the  successor  corporation  is  authorized  to  issue  such 
residue  of  bonds  either  in  its  own  name  or  in  the  name  of  the 
original  obligor. 

IX.   Provisions  Concerning  the  Trustee 

Theoretically  the  trustee  of  a  corporate  mortgage  ought  to 
have  an  active  supervision  of  the  trust;  but  practically  the 
liabilities  which  in  such  case  it  would  assume  would  be  alto- 
gether out  of  proportion  to  the  compensation  which  mortgagors 
are  able  or  willing  to  pay.1  In  fact,  the  compensation  paid  to 
trustees  for  services  prior  to  defaults  are  merely  a  reasonable 
sum  to  cover  the  value  of  supervision  and  clerical  work  in 
connection  with  the  issue  of  bonds. 

Accordingly,  the  responsible  trust  companies  in  New  York 
require  provisions  granting  them  immunities  from  the  strict 
duties  of  a  trustee.  They  assume  no  responsibility  for  acts  of 
agents  selected  with  reasonable  care,  or  for  anything  except 
willful  misconduct  or  gross  negligence.  They  assume  no  duty 
to  see  to  the  use  of  bonds  delivered  pursuant  to  the  provisions 
of  the  indenture  nor  for  the  validity  of  the  bonds  nor  the  value 
of  the  security.  They  are  not  to  be  bound  to  take  any  action 
toward  the  enforcement  of  the  trust  unless  notified  of  default 
by  bondholders  and  furnished  with  satisfactory  indemnity 
against  expense,  nor  required  to  take  any  action  unless  spe- 
cifically requested  so  to  do  by  a  specified  percentage  of  the  bond- 
holders, usually  10  per  cent  to  25  per  cent.  They  are  to  be 
protected  in  acting  upon  any  instrument  believed  by  them  to 
be  genuine,  and  are  entitled  to  advice  of  counsel  at  the  expense 

1  See  Rhinelander  v.  F.  L.  &  T.  Co.,  172  N.  Y.  519 ;  1902. 


COLLATERAL  TRUSTS  AND  DEBENTURE  INDENTURES  53 

of  the  mortgagor.  They  assume  no  responsibility  for  recitals 
and  statements  in  the  indenture,  and  make  no  covenant  as  to 
the  rights  of  any  person  thereunder,  nor  are  they  to  be  respon- 
sible for  the  recording  or  other  registration  of  the  indenture, 
nor  for  the  maintenance  of  insurance  of  the  mortgaged 
property. 

Provisions  should  be  inserted  for  the  removal  or  the  resig- 
nation of  the  trustee.  The  usual  provision  is  that  the  trustee 
may  resign  at  any  time  by  its  own  act  or  may  be  removed  by 
writing  under  the  hands  of  more  than  a  majority  or  more  than 
three-fourths  of  the  bondholders,  as  desired.  In  case  of  the 
trustee  so  ceasing  to  act,  it  is  usual  to  authorize  the  mortgagor 
company  immediately  to  appoint  a  successor,  subject  to  such 
appointee  being  superseded  by  a  trustee  appointed  by  a 
majority  or  more  of  the  bondholders. 

It  should  be  provided  specifically  that  in  case  any  corporate 
trustee  is  taken  under  the  control  of  a  public  officer  or  of  a 
receiver,  a  new  trustee  may  be  appointed.  In  one  instance 
where  a  corporate  trustee  was  in  the  hands  of  the  State 
banking  department,  it  was  considered  as  having  the  power 
neither  to  resign  nor  to  act  under  the  mortgage.  Provision 
should  be  made  also  that  a  corporation  succeeding  the  corporate 
trustee  by  merger  or  consolidation  ipso  facto  shall  succeed  to 
trusteeship  under  the  indenture.1  This  result  is  accomplished 
in  case  of  merger  by  a  statute  of  this  state;  but,  notwith- 
standing, the  counsel  of  several  railroads  having  property  in 
Western  States  have  considered  it  necessary,  in  the  absence 
of  such  a  provision,  to  have  executed  and  recorded  a  supple- 
ment to  the  indenture  establishing  the  transfer  of  title  on  the 
record. 

If  an  individual  trustee  be  associated  with  the  corporate 
trustee  the  indenture  should  limit  the  powers  and  duties  of  the 
individual  trustee.  So  far  as  law  will  permit,  the  corporate 
trustee  always  should  have  the  custody  of  stocks,  bonds  and 

1  See  Matter  of  Bergdorf,  206  N.  Y.  309 ;    1912. 


54     PREPARATION  OF  CORPORATE  BONDS,  MORTGAGES 

moneys,  and  also  all  powers  in  respect  of  the  certification  of 
bonds.  Any  notices  or  writings  delivered  to  the  corporate 
trustee  should  be  deemed  as  having  been  delivered  to  all  the 
trustees,  and  the  individual  trustee  should  be  authorized  to 
constitute  the  corporate  trustee  his  attorney  to  do  such  acts 
as  may  be  lawful.  The  individual  trustee  should  be  subject  to 
removal  at  any  time  by  joint  act  of  the  mortgagor  and  the 
corporate  trustee,  provision  being  made  also  for  the  appoint- 
ment of  his  successor. 

If  an  individual  trustee  be  not  appointed,  it  is  prudent  to 
include  in  the  indenture  an  express  provision  authorizing  the 
appointment  by  joint  action  of  the  trustee  and  the  company 
of  an  individual  trustee  whenever  required  by  the  law  of  any 
jurisdiction  in  which  mortgaged  property  is  situated,  or  in 
case  the  corporate  trustee  shall  deem  it  in  the  interests  of  the 
bondholders.  Of  course  if  the  trust  under  the  mortgage  has 
once  taken  effect,  the  statutory  disqualification  of  the  cor- 
porate trustee  would  not  prevent  the  enforcement  of  the  trust 
through  a  qualified  trustee  appointed  by  the  court,  but  it  is 
preferable  that  the  appointment  of  the  qualified  trustee  should 
be  made  by  the  company  and  the  representative  of  the  bond- 
holders rather  than  by  the  court.  The  object  to  be  accom- 
plished, where  statutes  require  the  appointment  of  an  individual 
trustee,  is  to  name  such  a  trustee  in  the  instrument  originally, 
giving  him  only  such  powers  as  relate  to  the  enforcement  of  the 
indenture  against  the  property  by  entry  or  legal  proceedings. 
Thus  the  grant  to  him  would  be  effective  to  constitute  a  trust, 
even  if  the  grant  to  a  corporation  foreign  to  the  jurisdiction  in 
which  the  property  was  located  would  be  void  under  a  statute. 
If  the  trust  has  once  taken  effect,  it  does  not  matter  much 
whether  the  individual  trustee  resigns  or  is  removed  or  dies. 
No  new  individual  trustee  need  be  appointed  until  action 
against  the  security  is  desired,  and  in  such  case  such  appoint- 
ment should  be  within  the  power  of  the  corporate  trustee  or 
the  company  or  both. 


COLLATERAL  TRUSTS  AND  DEBENTURE  INDENTURES  55 

X.   Possession  Prior  to  Default,  Defeasance  and  Notices 

In  the  early  mortgages,  these  essential  provisions  were  set 
forth  at  the  beginning  of  the  instrument,  but  now  they  are 
generally  relegated  to  the  end.  The  company  should  have  the 
right  to  retain  possession,  and  to  operate  the  mortgaged  premises, 
and  to  collect  and  enjoy  the  earnings.  However,  if  part  of  the 
security  consists  of  pledged  bonds  or  stock,  or  in  case  any  cash 
is  to  come  into  the  possession  of  the  trustee  under  the  inden- 
ture, such  security  or  cash  should  be  retained  by  the  trustee 
to  be  administered  under  provisions  specifically  relating  thereto. 

The  usual  defeasance  clause  is  to  the  effect  that  when  the 
whole  amount  due  and  payable  on  the  bonds  for  principal  and 
interest  and  all  other  obligations  under  the  indenture  are  dis- 
charged, the  estate  of  the  trustee  ceases,  and  at  the  expense 
of  the  company  the  trustee  is  to  cancel  the  indenture  and  to 
execute  any  conveyances  or  reassignments,  and  to  deliver  to 
the  company  any  personal  property  held  by  the  trustee.  The 
clause  is  desirable  principally  for  convenience  of  proof  that  the 
indenture  is  a  pledge  or  a  mortgage,  for  if  it  be  such,  any  proof 
to  that  effect  will  establish  the  right  of  the  obligor  to  a  return 
of  the  property  on  full  payment  of  the  debt. 

The  manner  in  which  notices  and  requests  to  the  trustee 
shall  be  executed  by  the  bondholders  and  the  method  of  con- 
clusively establishing  ownership  of  the  bonds  in  respect  of 
which  the  writing  is  made  should  be  clearly  set  forth. 

XI.    Acceptance  of  the  Trust 

The  formal  acceptance  of  the  trusts  by  the  trustee  is  a 
statement  that  such  trusts  are  accepted  upon  the  terms  and 
conditions  of  the  indenture.  Ordinarily  such  acceptance  does 
not  bind  the  trustee  by  the  covenants  of  the  mortgagor  1  but 
it  is  usual  also  by  express  disclaimer  to  guard  this  point. 

1  Rhinelander  v.  F.  L.  &  T.  Co.,  172  N.  Y.  519 ;   1902. 


56     PREPARATION  OF  CORPORATE  BONDS,  MORTGAGES 

XII.  Execution,  Acknowledgment,  Etc. 

The  instrument  closes  with  a  proper  attestation  clause 
signed  by  each  of  the  parties  by  the  officers  authorized  by  the 
resolutions,  and  the  corporate  seal  is  attested  by  the  secretary 
or  other  custodian.  Pennsylvania  requires  that  the  instrument 
shall  contain  an  express  power  of  attorney  to  specified  persons 
to  execute.  Many  of  the  states  require  that  the  instrument 
should  be  witnessed  by  two  or  more  witnesses. 

Care  should  be  taken  that  the  acknowledgment  or  proof  of 
the  instrument  complies  with  the  requirements  of  the  record- 
ing statutes  in  each  and  every  jurisdiction  in  which  any  part 
of  the  mortgaged  property  is  situate.  In  some  cases  it  is  con- 
sidered preferable  to  have  a  separate  acknowledgment  executed 
in  statutory  form  for  record  in  each  such  State.  In  South 
Carolina  proof  is  required  instead  of  acknowledgment.  Where 
proof  is  required,  strict  compliance  with  the  statute  is  neces- 
sary, failure  to  state  the  place  of  residence  of  the  subscribing 
witness  being  regarded  in  some  jurisdictions  as  a  fatal  defect. 
A  defective  proof  or  acknowledgment  generally  vitiates  the 
record  as  constructive  notice,  and  in  some  jurisdictions  the 
conveyance  itself. 

The  officer  before  whom  the  acknowledgment  is  taken  should 
be  disinterested,  for  in  many  jurisdictions  it  is  considered  that 
if  he  be  an  interested  party  he  is  disqualified  from  acting  in 
this  quasi  judicial  capacity.  Corporate  mortgages  have  been 
denied  the  protection  of  the  recording  acts,  when  acknowledged 
before  a  notary  public  who  was  also  a  stockholder  in  the 
trustee  corporation  or  even  in  the  mortgagor  corporation, 
though  not  so  in  New  York.1  It  is  said  also  that  the  acknowl- 
edgment should  not  be  taken  by  the  attorney  for  either  the 
mortgagor  or  the  trustee. 

In  many  of  the  Western  and  Southern  States  there  is  a  re- 
quirement that  all  mortgages  covering  personal  property  shall 

1  Canandaigua  Academy  v.  McKechnie,  90  N.  Y.  618-629 ;   1882. 


COLLATERAL  TRUSTS  AND  DEBENTURE  INDENTURES  57 

contain  an  affidavit  by  the  mortgagor  and  the  mortgagee  that 
the  instrument  is  made  in  good  faith  to  secure  a  specified  debt 
and  not  with  any  design  to  hinder,  delay  or  defraud  creditors. 
The  statutes  should  be  consulted  as  to  the  form  of  such  affi- 
davits and  to  ascertain  whether  or  not  they  are  required  to  be 
recorded  with  the  instrument. 

Of  course,  there  should  be  a  prompt  and  formal  delivery  of 
the  instrument  to  the  trustee  or  its  agent,  and  in  many  juris- 
dictions a  record  within  a  specified  period  after  delivery.  In 
some  jurisdictions  the  record  of  the  mortgage  by  the  mortgagor 
is  deemed  prima  facie  evidence  of  delivery,  but  as  this  is  refut- 
able it  is  better  that  actual  delivery  be  made. 

Collateral  indentures,  debentures,  income  bonds  and  guaran- 
tees and  Stock  Exchange  Rules  will  next  be  considered. 

Collateral  Trust  Indentures 

The  term  "Collateral  Trust  Indenture"  is  understood  usually 
to  refer  to  agreements  whereby  corporate  bonds  or  stock  or 
both  are  pledged  or  assigned  in  trust  to  a  trustee  as  security 
for  a  series  of  notes  or  bonds.  The  pledge  of  such  collateral 
securities  almost  always  is  a  feature  also  of  trust  deeds  cover- 
ing realty,  and  repetition  will  be  avoided  by  treating  under 
this  head  of  Collateral  Trust  Indentures,  such  pledges,  when 
so  included  in  deeds  of  trust,  to  which  will  apply  also  these 
provisions  of  pledge  and  the  various  provisions  for  the  adminis- 
tration of  securities  so  pledged. 

Ordinarily,  the  stock  pledged  under  such  agreements  is  the 
stock  of  some  company  or  companies  subsidiary  to  the  pledger, 
and  the  bonds  pledged  are  either  those  of  such  subsidiary 
companies,  or  long-term  mortgage  bonds  of  the  obligor  pledged 
as  security  for  its  own  short-term  notes.  Security  of  the  latter 
class  is  resorted  to  when  short-time  money  is  obtainable  on 
better  terms  than  long-time  money.  Accordingly,  the  cor- 
poration issues  a  series  of  notes  payable  within  a  few  years, 


58    PREPARATION  OF  CORPORATE  BONDS,  MORTGAGES 

and  secured  by  the  pledge  of  its  own  long-term  mortgage 
bonds,  the  expectation  being  that  such  bonds  may  be  sold  on 
favorable  terms  at  the  maturity  of  the  notes,  which  then  may 
be  paid  from  the  proceeds.  Unless  secured  by  mortgage  such 
pledged  bonds,  being  merely  the  obligations  of  the  pledgor, 
would  not  constitute  collateral  security  for  the  pledger's  own 
notes. 

In  case  of  bond  issues  secured  by  the  pledge  of  stocks  and 
bonds  of  companies  subsidiary  to  the  obligor,  it  is  necessary 
to  guard  against  possible  dilution  by  the  subsidiary  com- 
pany through  an  increase  of  its  stock  or  the  incurring  of 
obligations  having  priority  to  the  securities  so  pledged  by 
the  holding  company.  The  protective  provision  usually  in- 
serted in  the  indenture  is  that  there  shall  be  no  increase  of 
stock  unless  there  be  pledged  under  the  indenture  such  amount 
of  the  stock  so  added  as  shall  be  necessary  to  maintain  there- 
under the  same  proportion  of  the  whole  issue  as  that  thereto- 
fore pledged  under  the  indenture  and  either  that  no  debt 
shall  be  incurred  by  the  subsidiary  company  except  in  the 
usual  course  of  its  regular  business,  or  else  that  if  bonds  or 
notes  shall  be  issued  either  the  whole  amount  or  a  portion 
thereof  as  stated  shall  be  brought  under  the  pledge.  It  is  cus- 
tomary to  provide  also  that  any  stocks  and  bonds  of  the  pledged 
issues  held  by  others  at  the  time  of  the  pledge  but  thereafter 
under  any  circumstances  acquired  by  the  pledgor  shall  be 
brought  under  the  pledge.  In  every  such  case  the  indenture 
should  authorize  the  cancellation  and  discharge  of  the  indebted- 
ness so  brought  under  the  pledge,  thus  restoring  the  original 
value  of  the  pledged  shares. 

Sometimes  a  so-called  holding  company  with  a  large  number 
of  subsidiaries  desires  to  create  a  subordinate  lien  upon  col- 
lateral theretofore  pledged  to  and  held  by  a  trustee  as  security 
for  an  outstanding  bond  issue  of  the  pledgor.  This  purpose 
is  accomplished  by  assigning  to  a  trustee  the  equity  remaining 
in  the  pledgor  company,  and  by  providing  for  the  appropria- 


COLLATERAL  TRUSTS  AND  DEBENTURE  INDENTURES  59 

tion  to  the  benefit  of  such  subordinate  debt,  of  the  pledged 
securities,  whenever  they  shall  have  been  released  from  the 
existing  pledge.  Such  a  prior  lien  and  such  a  secondary  lien 
on  pledged  stocks  and  bonds  were  created  by  the  two  inden- 
tures of  the  United  States  Steel  Corporation  of  1901  and  1903 
to  the  United  States  Trust  Company,  as  trustee,  which  holds  a 
vast  amount  of  stocks  and  bonds  as  security  for  the  two  in- 
dentures in  the  order  of  their  stated  priority.  This  illustrates 
the  desirability  (indicated  already  in  the  previous  reference  to 
the  Erie  First  Consolidated  Mortgage  of  1895  and  the  New 
York  Central  Mortgage  of  1913)  of  having  the  same  trustee 
in  respect  of  indentures  securing  liens  of  different  rank,  by  the 
pledge  of  stocks  or  bonds  or  other  intangibles,  for  only  by  such 
actual  holding  by  one  trustee  can  there  be  perfected  a  technical 
pledge  for  the  protection  of  the  junior  debt. 

The  trustee  should  be  authorized  to  transfer  registered  bonds 
into  its  own  name,  to  exchange  coupon  bonds  for  bonds  so 
registered,  and  also  to  transfer  into  its  own  name,  or  into  the 
name  of  its  nominee,  any  shares  of  pledged  stock. 

But  in  pledging  such  bonds  or  stocks  the  pledgor  corporation 
must  guard  two  important  points,  viz.  that  unless  or  until 
it  shall  have  made  default,  it  may  receive  the  income  there- 
from in  the  shape  of  dividends  or  interest,  and  to  the  fullest 
extent  consistent  with  the  special  provisions  of  the  pledge  may 
exercise  the  voting  rights  in  respect  of  the  stock.  This  requires 
express  provision,  as  under  the  general  rule  of  law  the  pledgee 
would  be  entitled  to  have  the  income  of  the  pledged  securities 
applied  towards  the  payment  of  the  debt  so  secured. 

As  to  income,  the  provisions  ordinarily  are  that  until  default 
the  pledgor  shall  have  the  right  to  collect  the  dividends  and 
the  interest,  and,  if  necessary,  to  receive  from  the  trustee 
appropriate  orders  for  that  purpose.  These  provisions  should 
be  qualified  so  that  the  pledgor  company  may  not  collect  any 
interest  or  any  dividends  unless  the  same  shall  be  paid  out  of 
the  ordinary  income  of  the  issuing  company  or  collect  the 


60    PREPARATION  OF  CORPORATE  BONDS,  MORTGAGES 

same  by  legal  proceedings,  or  retain  any  stock  dividends,  or 
exercise  any  rights  in  respect  thereof  except  to  collect  and  dis- 
charge the  same.  In  the  event  that  any  sum  shall  become 
receivable  on  account  of  the  principal  of  pledged  bonds,  or  on 
account  of  pledged  stock  out  of  capital  on  distribution  or  dis- 
solution, it  should  be  provided  that  all  such  proceeds  shall  be 
received  by  the  trustee  and  be  applied  to  the  improvement  of 
the  security  either  through  the  acquisition  of  additional  property 
or  by  retirement  of  part  of  the  secured  debt.  There  should  be 
further  provisions  empowering  the  trustee  to  enforce  its  rights 
as  the  holder  of  the  pledged  bonds  and  stock  by  legal  proceed- 
ings in  cases  of  foreclosure,  dissolution  or  winding  up,  and  also 
to  make  use  of  such  stock  and  bond  holdings  to  acquire  the 
property  of  the  company  issuing  the  same.  These  provisions 
must  be  phrased  with  care  and  precision. 

As  to  the  reserved  right  of  the  pledgor  to  vote  on  pledged 
stock  and  for  such  purpose  to  receive  proxies  from  the  trustee, 
it  will  be  well  to  specify  that  the  pledgor  shall  have  the  right 
not  only  to  vote  but  also  to  give  the  consent  required  under 
provision  of  any  law,  or  by  law  or  contract  in  respect  of  such 
pledged  stock.  Recently  a  trustee  acknowledging  its  duty  to 
give  to  the  pledgor  a  proxy  to  vote  at  a  corporate  meeting  in 
respect  of  the  pledged  stock,  denied  its  power  to  give  to  the 
pledgor  the  equivalent  power  to  execute  the  written  consent 
authorized  by  the  Stock  Corporation  Law  in  lieu  of  such  meet- 
ing and  vote.  This  technical  construction  required  the  delay, 
trouble  and  expense  of  calling  a  wholly  unnecessary  meeting  of 
stockholders. 

A  privilege  most  convenient  to  the  pledgor  and  by  it  often 
availed  of,  is  that  authorizing  the  use  of  pledged  stocks  and 
bonds  in  effecting  consolidations  or  mergers  of  the  company  by 
which  the  same  were  issued,  and  allowing  the  requisite  sub- 
stitution of  securities.  The  pertinent  clauses  should  contain 
provisions  for  maintaining  the  value  of  the  security,  and  re- 
quiring opinion  of  counsel  as  to  legal  effect  of  the  proceedings. 


COLLATERAL  TRUSTS  AND  DEBENTURE  INDENTURES  61 

Of  course  there  can  be  no  objection  to  permitting  the  pledger 
company  to  acquire  by  merger  or  by  purchase  the  property  of 
any  subsidiary  company,  if  all  property  so  acquired  shall  be 
subjected  to  the  lien  of  the  pledge. 

There  should  be  provisions  authorizing  the  renewal  or  exten- 
sion of  pledged  bonds,  or  the  renewal  or  extension  of  any  bonds 
by  companies  whose  stock  is  pledged,  subject  to  specified  con- 
ditions intended  for  the  protection  of  the  security.  The 
pledger  also  should  reserve  the  right  to  require  a  reassignment 
of  pledged  shares  necessary  to  qualify  directors. 

The  pledge  should  provide  that  the  company  issuing  the 
pledged  stock  should  not  sell  its  property  nor  lease  the  same, 
except  by  a  lease  expressly  conferring  upon  the  trustee  the 
superior  right  to  terminate  such  a  lease  in  case  of  default  under 
the  mortgage. 

The  collateral  trust  indenture,  as  well  as  a  mortgage  con- 
taining a  pledge  of  stocks,  generally  contains  various  special 
stipulations  as  a  result  of  negotiations  between  the  issuing  cor- 
poration and  the  intending  buyer  of  the  bonds  to  be  issued. 
Such  stipulations  have  no  direct  relation  to  the  mortgage  or 
other  security,  but  are  constituted  covenants  for  the  failure  to 
perform  which  the  remedies  under  the  mortgage  may  be  en- 
forced. 

Among  such  covenants  are  the  following : 

(1)  Sinking  fund.  A  valuable  safeguard  to  the  bondholder 
is  a  provision  in  the  indenture  requiring  the  obligor's  amortiza- 
tion of  its  debt  by  annual  payments  into  a  sinking  fund.  In 
early  mortgages,  even  of  railroads,  such  sinking  fund  provisions 
were  quite  common,  but  later  fell  into  disuse  except  in  cases  of 
mining,  lumbering  and  shipping  corporations  and  the  smaller 
manufacturing  companies.  Recently,  however,  the  desirability 
of  providing  for  amortization  of  the  corporate  debt  is  being 
widely  realized,  and  the  vendibility  of  a  bond  is  helped  mate- 
rially by  the  existence  of  a  sinking  fund,  even  though  it  be 
sufficient  to  retire  only  a  third  or  a  half  of  the  debt. 


62    PREPARATION  OF  CORPORATE  BONDS,  MORTGAGES 

Broadly  speaking,  sinking  funds  are  of  two  classes  —  (1)  the 
ordinary  sinking  fund  in  which  the  moneys  are  applied  to  the 
payment  and  the  cancellation  of  the  bonds,  and  (2)  the  sinking 
fund  known  among  bond  dealers  as  "cumulative,"  in  which 
the  bonds  acquired  by  the  use  of  sinking  fund  moneys  are  held 
in  the  sinking  fund  as  enforcible  obligations  entitling  the 
trustee  to  collect  from  the  company  the  interest  thereon  as 
additional  payments  to  the  sinking  fund.  Under  a  cumulative 
sinking  fund  the  moneys  receivable  increase  from  year  to  year 
and  promote  a  rapid  retirement  of  the  debt. 

To  make  really  effective  any  sinking  fund  —  necessarily  any 
cumulative  sinking  fund  —  the  bonds  should  be  subject  to 
redemption  or  purchase  for  purposes  of  the  sinking  fund,  so 
that  by  calling  a  sufficient  amount  for  redemption,  if  not 
otherwise  obtainable,  the  moneys  may  be  applied  promptly  to 
the  acquisition  of  bonds. 

In  the  absence  of  a  redemption  provision,  the  indenture 
should  provide  for  the  investment  of  the  sinking  fund  moneys 
until  bonds  may  be  secured  within  the  specified  price. 

The  usual  provision  is  to  allow  the  company  to  make  sinking 
fund  payments  either  in  cash  or  in  bonds  of  the  issue  at  a  price 
not  greater  than  par;  and  that  any  moneys  received  by  the 
trustee  may  be  applied  by  it  to  the  purchase  in  the  market  of 
such  bonds  at  a  stated  price,  but  not  greater  than  the  redemp- 
tion price. 

The  sinking  fund  is  established  by  a  covenant  to  pay  to  the 
trustee  under  the  indenture  (or  to  a  separate  sinking  fund 
trustee)  on  specified  dates,  annually  or  more  frequently, 
amounts  of  money  either  specified  or  determinable.  In  the 
case  of  mining  and  lumbering  companies  and  companies  whose 
property  is  consumed  in  operation,  the  sinking  fund  should  be 
based  upon  the  consumption  of  the  wasting  property,  measured 
either  by  actual  exhaustion  or  computed  upon  the  basis  of 
the  obligor's  earnings  from  such  wasting  property.  Where  the 
value  of  the  property  depends  upon  franchises  or  leases,  the 


COLLATERAL  TRUSTS  AND  DEBENTURE  INDENTURES  63 

sinking  fund  should  be  calculated  so  as  to  retire  the  bonds  prior 
to  the  termination  of  the  franchises  or  leases.  Such  a  sinking 
fund  is  illustrated  in  the  Interborough  Rapid  Transit  Mort- 
gage of  1913. 

If  the  sinking  fund  be  cumulative,  the  company  covenants 
to  pay  also  the  interest  on  the  bonds  acquired  for  the  sinking 
fund  when  and  as  the  same  shall  mature. 

The  indenture  should  provide  that  in  case  its  purchase  of 
bonds  shall  not  exhaust  the  sinking  fund,  the  sinking  fund 
trustee  shall  determine  by  lot  the  numbers  of  the  bonds  to  be 
redeemed ;  should  specify  the  method  of  publication  of  notice 
of  the  redemption  of  the  bonds  called ;  and  should  recite 
that  upon  the  presentation  of  the  bonds,  with  all  coupons 
maturing  after  the  redemption  date  there  shall  be  paid  out 
of  the  sinking  fund  the  amount  due  thereon  for  principal  and 
premium. 

The  right  to  purchase  or  redeem  all  of  the  bonds  at  once 
should  be  reserved  to  be  exercised  in  the  same  manner  except- 
ing of  course  the  lottery  for  determination  of  bonds.  It  should 
be  provided  also  that  from  the  date  to  be  fixed  by  publication 
of  which  holders  of  bonds  would  be  bound  to  take  notice,  the 
earning  of  interest  on  all  called  bonds  shall  cease. 

Unless  it  be  intended  that  the  accrued  interest  on  the  bonds 
also  is  to  be  paid  out  of  the  sinking  fund,  the  indenture  should 
provide  that  the  interest  obligations  maturing  on  the  redemp- 
tion day  should  be  paid  in  accordance  with  the  terms  thereof 
by  the  obligor  out  of  its  own  funds. 

The  date  for  redemption  customarily  is  an  interest  payment 
day,  though  of  course  this  is  a  matter  of  convenience  subject 
to  agreement  between  the  persons  interested. 

If  the  bonds  are  not  subject  to  redemption  for  the  sinking 
fund,  provision  should  be  made  for  the  investment  of  the  sink- 
ing fund  moneys  with  adequate  specification  of  the  classes  of 
investments  and  the  powers  of  the  sinking  fund  trustee  in 
respect  thereof. 


64    PREPARATION  OF  CORPORATE  BONDS,  MORTGAGES 

Of  course  any  undue  funding  may  accelerate  the  date  upon 
which  bonds  may  be  called.  This  will  not  be  permitted  by  the 
courts.1  The  right  of  the  bondholder  to  continue  his  invest- 
ment until  payable  in  due  course,  is  as  inviolable  as  his  right 
to  receive  payment  at  maturity.  The  right  of  the  obligor  to 
free  himself  from  his  interest-bearing  debt  when  due  either 
upon  a  named  or  accelerated  date,  as  the  stipulation  may  war- 
rant, is  similarly  inviolable.  These  relative  and  conflicting  rights 
must  be  made  the  subject  of  careful  and  adequate  stipulations. 

(2)  Redemption  before  maturity.  The  right  to  redeem  before 
maturity  is  a  valuable  privilege  to  the  obligor,  particularly 
one  obligated  to  supply  a  sinking  fund.  The  redemption 
price  may  be  par  or  a  premium  over  par.  The  redemption 
price  is  a  matter  of  bargain  between  the  obligor  and  the  bond 
buyer.  Usually  it  operates  as  a  peg  to  stop  the  increase  in 
the  market  price  of  the  bonds,  and  therefore  a  redemption 
price  high  enough  to  leave  some  speculative  possibility  of  in- 
crease in  such  market  price  is  the  usual  insistence  of  the  bond 
buyer.  The  longer  the  term  of  the  bond  the  higher  soars  the 
redemption  price.  The  redemption  price  varies  from  par  up  to 
ten  per  cent  or  fifteen  per  cent  above  par.  Redemption  provi- 
sions are  disadvantageous  also  to  the  bond  buyer  in  that  he  may 
fail  to  take  timely  notice  of  the  publication  of  redemption  and 
thus  may  lose  some  interest  in  an  interval  between  investments. 
Except  for  purposes  of  a  sinking  fund,  therefore,  the  more 
general  provision  is  that  the  issue  shall  be  subject  to  redemp- 
tion only  as  an  entirety  or  in  comparatively  large  installments, 
and  during  a  period  beginning  some  years  subsequent  to  the 
issue,  and  at  a  price  estimated  as  probably  equal  to  any  ad- 
vance in  the  market  price  of  the  bonds.  The  above  comments 
on  the  calling  of  bonds  for  the  sinking  fund  are  pertinent  also  to 
redemption  of  bonds  for  retirement  by  the  company. 

1  M.  K.  &  T.  Ry.  v.  Union  Trust  Co.,  156  N.  Y.  592;  1898;  Harnickell  v. 
Omaha  Water  Co.,  146  App.  Div.  N.  Y.  693 ;  1911. 


COLLATERAL  TRUSTS  AND  DEBENTURE  INDENTURES  65 

(3)  The  right  to  convert  into  stock.  As  an  aid  to  the 
sale  of  bonds  sometimes  there  is  given  to  bondholders  the 
right,  during  a  specified  period,  to  convert  the  bonds  into 
stock  of  the  company  at  a  specified  rate.  The  right  to  issue 
convertible  bonds  and  the  rate  of  conversion  are  governed,  of 
course,  by  the  statutes  affecting  the  corporation.  When  the 
corporation  sells  the  bonds  at  less  than  par,  thus  varying  the 
actual  as  distinguished  from  the  nominal  consideration  for 
the  stock  issuable,  the  question  as  to  whether,  under  the  local 
rule  of  law,  the  discount  or  underwriters'  commissions  or  other 
deductions  raise  any  question  as  to  the  full  payment  of  the 
stock  when  issued,  must  be  determined  upon  the  facts  and  the 
law  in  each  case. 

As  the  exercise  of  the  right  of  conversion  affects  the  security 
of  the  bonds  issued  only  by  improving  it  by  reducing  the 
debt  secured,  considerable  liberty  may  safely  be  allowed 
the  corporation  in  fixing  the  terms  of  the  conversion,  even 
among  different  series  of  the  same  issue.  Inherently,  the  right 
is  an  individual  right  of  each  bondholder  as  distinguished  from 
his  common  right  with  other  bondholders  in  the  benefit  of  the 
security.  Such  being  the  case,  provisions  in  the  indenture  re- 
stricting the  right  of  enforcement  of  the  covenants  by  joint 
action  of  a  number  of  bondholders,  should  except  the  bond- 
holders' right  to  enforce  the  conversion  privilege.  All  conver- 
sion privileges  should  contain  a  covenant  that  the  corporation 
will  make  such  increase  of  its  stock  as  may  be  necessary  to 
provide  for  the  conversion  when  made.  Bonds  converted  should 
be  canceled  and  not  reissued.  In  case  the  bonds  are  redeem- 
able, provision  should  be  made  that  the  company  may  not, 
by  redeeming  the  bonds,  destroy  the  conversion  right 
without  affording  reasonable  opportunity  to  the  bondholder 
to  make  conversion.  As  observed  above  in  the  discussion  of 
mortgage  provisions,  it  is  necessary  to  safeguard  the  conver- 
sion privilege  so  that  if  desired  upon  or  after  consolidation  it  may 
be  exercised  in  respect  of  stock  of  the  consolidated  corporation. 


66    PREPARATION  OF  CORPORATE  BONDS,  MORTGAGES 

(4)  Maintenance  of  specified  amounts  of  net  quick  assets.  In- 
dentures creating  no  trust  fund  as  security,  or  constituting 
merely  a  pledge  or  assignment  of  stock  of  subsidiary  com- 
panies of  the  obligor,  often  contain  a  covenant  that  the 
obligor  or  subsidiary  companies  will  maintain  a  specified  per- 
centage of  net  quick  assets  whereof  verified  statements  are 
to  be  furnished  periodically  to  the  trustee,  and  that  failure  to 
maintain  such  assets  shall  constitute  a  default  authorizing  the 
declaration  of  the  maturity  of  the  principal  of  the  bonds  and 
the  enforcement  of  all  remedies.  The  object  is  to  enable  the 
bondholders  to  act  in  case  the  company  is  tending  towards  in- 
solvency. If  such  a  provision  be  inserted  in  the  indenture, 
care  must  be  taken  to  specify  the  method  of  computing  the 
assets  and  the  items  to  be  included  in  the  computation. 

Debenture  Agreements 

In  the  United  States,  as  already  mentioned,  the  term  "de- 
benture" is  understood  to  mean  serial  obligations  of  a  corpora- 
tion not  secured  by  a  specific  mortgage,  pledge  or  assignment 
of  property.  Of  course  a  series  of  debentures  may  be  issued 
without  the  execution  of  any  indenture  relating  thereto.  Prior 
to  1900  the  few  issues  that  had  been  made  of  such  debentures 
were  not  accompanied  by  a  trust  agreement.  In  such  case  the 
rights  and  privileges  given  to  bondholders  were  set  forth  at 
length  in  the  obligation,  thus  making  a  somewhat  lengthy 
instrument.  Since  an  issue  of  debentures  under  trust  agree- 
ments by  the  Lake  Shore  R.  R.  Co.  and  by  the  New  York 
Central,  the  custom  of  adopting  such  agreements  has  become 
general.  Originally  in  1893  the  General  Electric  Company 
made  a  large  issue  of  debentures  without  an  agreement,  but 
at  the  time  of  the  refunding  in  1912  a  trust  agreement  was 
executed. 

Generally  the  trust  agreement  contains  covenants  additional 
to  those  providing  for  the  registration  or  interchange  of  the 
debentures,  intended  for  the  benefit  of  the  debenture  holder. 


COLLATERAL  TRUSTS  AND  DEBENTURE  INDENTURES  67 

Among  such  beneficial  covenants  may  be  mentioned  those  for 
the  immediate  maturity  of  the  principal  by  declaration  in  case 
of  default  under  other  outstanding  obligations,  or  in  case  of 
bankruptcy  or  insolvency  or  receivership,  etc. ;  those  that  the 
debentures  shall  be  secured  equally  or  otherwise  under  any 
future  mortgage  made  by  the  obligor ;  those  requiring  the  obli- 
gor to  maintain  indicated  amounts  of  quick  assets  or  prohibit- 
ing increase  of  indebtedness.  The  trust  agreement  also  may 
contain  provisions,  which  may  not  be  set  forth  in  adequate 
detail  in  the  debentures  themselves,  for  the  redemption  or  for 
the  conversion  into  stock  of  the  debentures.  Generally  in  fact 
all  provisions  of  a  corporate  mortgage,  except  those  relating 
to  the  security  and  its  enforcement,  are  appropriate  and  useful 
in  the  debenture  agreement. 

In  the  case  of  debenture  issues  the  real  difficulty  presented 
is  to  insure  their  enforcement  equally  and  ratably  for  the  benefit 
of  all  holders,  and  to  prevent  preferences  on  the  part  of  the 
company,  or,  in  case  of  default,  a  race  of  diligence  between 
holders.  It  is  somewhat  uncertain  whether  this  can  be  accom- 
plished satisfactorily  without  affecting  the  negotiability  of  the 
paper,  if  negotiable  instrument  laws  are  intended  to  limit 
flexibility  in  the  form  of  negotiable  instruments.  Unless 
affected  by  the  so-called  uniform  statutes,  the  general  rule  of 
law  was  that  negotiability  depended  not  only  upon  statutes 
but  upon  the  custom  of  merchants,  i.e.  the  law  merchant. 
It  certainly  is  the  custom  of  merchants  to  regard  a  bearer  deben- 
ture as  negotiable  even  though  it  contains  a  provision  limiting 
the  right  of  individual  enforcement.  The  English  debentures 
contain  on  their  face  the  recital  that  they  are  issued  subject 
to  conditions  indorsed  thereon,  which  are  to  be  deemed  part 
of  the  debentures,  and  although  such  provisions  are  not  in 
accordance  with  the  strict  idea  of  negotiability  it  is  there 
recognized  that  bearer  debentures  are  negotiable  instruments. 
This  is  in  accordance  with  the  popular  understanding  under 
which  stock  certificates  are  regarded  as  negotiable  while  they 


68    PREPARATION  OF  CORPORATE  BONDS,  MORTGAGES 

are  merely  assignable.  The  fact  is  that  the  term  "negotiable" 
has  a  double  outlook,  one  towards  transfer  by  delivery;  the 
other  towards  relief  of  the  transferee  from  the  prior  defects  of 
title.  It  is  in  the  latter  sense  only  that  debentures  are  rendered 
non-negotiable  by  reason  of  the  restrictions  usual  in  the  col- 
lateral indenture.  No  one  would  hesitate  to  deem  them  as 
transferable  by  delivery  and  in  that  sense  negotiable. 

In  England  it  is  a  common  practice  to  give  to  the  holders  of 
a  majority  or  more  of  debentures  the  power  to  sanction  certain 
modifications  of  the  rights  of  the  holders  as  a  body,  such 
power  being  exercisable  by  resolution  at  a  meeting  or  by  a 
provisional  agreement  for  modification  made  on  behalf  of  all 
and  sanctioned  in  writing  by  a  specific  percentage.  The  object 
of  conferring  this  power  on  the  majority  is  to  protect  it  against 
unreasonable  conduct  on  the  part  of  the  minority  and  to  pre- 
vent a  defeat  of  a  beneficial  arrangement  because  unanimity 
cannot  be  obtained.1 

Though  in  the  United  States  it  is  unusual  to  give  to  majori- 
ties of  bondholders  such  a  right  to  sanction  modifications  of 
the  indenture,  there  is  inserted  here  in  many  indentures  in- 
cluding mortgages  a  provision  that  in  case  of  default  and  to 
avoid  a  foreclosure  and  sale,  the  trustee  may  consent  to  a  plan 
of  reorganization  which  shall  authorize  the  creation  of  a  lien 
prior  to  that  of  the  indenture  for  the  purpose  of  obtaining 
necessary  moneys;  the  authority  being  exercisable  by  regis- 
tered holders  of  not  less  than  four-fifths  of  the  bonds  by  a 
writing  directed  to  the  trustee.  The  right  is  given  only  to 
registered  holders  in  order  that  the  consent  may  be  properly 
evidenced,  and  of  course  any  coupon  bond  may  be  registered 
for  that  purpose.  The  power  generally  is  limited  so  that  no 
bond  shall  be  changed  as  to  the  amount  of  principal,  or  rate  or 
date  of  payment  of  interest.  Such  agreement  authorized  to  be 
made  in  behalf  of  all  the  bondholders  is  to  be  reduced  to  a 
written  agreement  between  the  company  and  the  trustee  and 

*3  Palmer  Company  Precedents,  162;    llth  Ed.,  1912. 


COLLATERAL  TRUSTS  AND  DEBENTURE  INDENTURES  69 

in  case  of  mortgages  is  to  be  recorded  in  the  various  jurisdic- 
tions as  a  modification  thereof. 

The  United  States  Steel  Corporation  trust  indentures  con- 
tain unusual  provisions  for  meetings  of  bondholders  to  take 
action  upon  proposed  modifications  of  the  indentures. 

There  may  be  inserted  in  the  indenture  also  a  provision  that 
registered  holders  may  direct  the  trustee  at  any  sale  under  the 
mortgage  to  purchase  the  premises  for  the  use  and  benefit  of 
all  the  bondholders,  and  in  such  case  to  settle  for  the  purchase 
price  by  receipting  for  the  entire  amount  of  the  proceeds  ap- 
plicable to  the  payment  of  the  bonds  and  interest,  thus  limiting 
bondholders'  rights  to  a  share  in  the  proceeds  of  the  premises 
so  purchased.  To  that  end  the  trustee  may  transfer  the 
property  to  a  new  corporation  to  be  organized  as  directed  by 
the  bondholders  making  such  request,  and  thereupon  shall  dis- 
tribute the  securities  according  to  any  plan  of  reorganization 
so  agreed  upon  by  said  bondholders. 

(5)  Income  bonds.  In  connection  with  reorganizations,  often- 
times in  order  to  provide  for  the  settlement  of  outstanding 
obligations  of  the  predecessor  corporation,  it  becomes  neces- 
sary to  issue  promissory  obligations  upon  which  the  interest 
charge  shall  be  conditional  upon  the  realization  of  adequate 
net  earnings  by  the  obligor.  Seldom  if  ever  are  such  bonds 
issued  for  new  financing  by  a  solvent  corporation.  The  pay- 
ment of  interest  sometimes  is  made  conditional  throughout 
the  life  of  the  bond  but  generally  only  during  a  limited  period 
of  years  after  issue.  In  the  case  of  such  bonds  the  covenant 
to  pay  interest  may  be  made  conditional  upon  the  determina- 
tion by  the  company  that  the  amount  has  been  earned,  sup- 
plemented by  specific  provisions  as  to  the  method  of  computing 
the  earnings  for  the  purpose.  Much  litigation  in  respect  of 
income  bonds  has  arisen  because  of  disputes  as  to  the  compu- 
tation of  the  earnings,  and  too  much  care  may  not  be  given 
to  avoid  uncertainties.  The  case  of  Mackintosh  v.  Flint  & 


70     PREPARATION  OF  CORPORATE  BONDS,  MORTGAGES 

P.  M.  R.  Co.,1  between  different  classes  of  stockholders,  illus- 
trates the  difficulty  of  determining  the  amount  of  net  earnings, 
and  the  difficulty  even  greater  of  finding  a  judicial  officer  fully 
equal  to  solving  the  problem  in  the  masterly  manner  of  Judge 
Jackson  in  that  case. 

Guaranties 

Corporate  bonds  are  often  guaranteed  by  other  corporations. 
The  validity  of  such  guaranty  by  a  strong  company  is  a  matter 
of  serious  concern  to  the  taker  of  the  bond  of  a  weak  obligor. 
Such  a  guaranty  cannot  be  given  by  a  corporation,  as  an  ac- 
commodation, or  merely  because  of  some  direct  compensation 
by  it  received  therefor.2  It  is  valid  only  if  authorized  expressly 
by  law,3  or  for  a  legitimate  purpose  incidental  to  the  main  busi- 
ness of  the  corporation,4  such  as  the  enhancement  of  the  value 
of  bonds  owned  by  it,  upon  its  sale  thereof,5  or  as  part  of  its 
lawful  agreement  to  purchase  the  shares  or  bonds  of  holders 
thereof,6  or  for  the  protection  of  its  property  interest  in  the 
company  whose  obligation  it  so  guarantees,7  though  it  is  ques- 
tioned whether  a  New  York  corporation  could  exercise  such  a 
power  in  this  latter  case,  except  by  a  vote  of  the  holders  of 
two-thirds  of  its  stock.8  A  general  guaranty  of  negotiable  paper 
is  itself  negotiable  in  the  sense  of  being  transferable  or  assign- 
able.9 The  guaranty  inures  to  the  benefit  of  the  assignee  of  the 
principal  debt  even  though  not  mentioned  in  the  assignment.10 

1  34  Fed.  Rep.  582  ;   1888. 

2  In  re  Romadka  Co.,  216  Fed.  Rep.  (U.  S.)  113-114  ;    1914. 

3  See  New  York  Stock  Corporation  Law,  Section  8  ( N.  Y.  Consolidated  Laws, 
Ch.  61). 

«  Holmes  v.  Willard,  125  N.  Y.  75-81 ;  1890. 

6  Olcott  v.  Tioga  R.  R.  Co.,  27  N.  Y.  546 ;  1863 ;  Arnot  v.  Erie  R.  Co.,  67 
N.  Y.  315 ;  R.  R.  Co.  v.  Howard,  7  Wall.  (U.  S.)  392 ;  1868  ;  Rogers  &c.  v, 
Southern  R.  Ass.,  34  Fed.  278 ;  1888. 

6  Windmuller  v.  Standard  Co.,  106  App.  Div.  (N.  Y.)  246 ;    1905. 

7  Re  N.  Y.  Car  Wheel  Works,  141  Fed.  (U.  S.),  430;    1906. 

8  Stock  Corporation  Law,  Section  8  (N.  Y.  Consolidated  Laws,  Ch.  61). 

9  Claflin  v.  Ostrom,  54  N.  Y.  581 ;    1874 ;   Everson  v.  Gere,  122   N.  Y.  290 ; 
1890;  Arents  v.  Com.,  18  Gratt.  (Va.),  750;    1868. 

10  Stillman  v.  Northrup,  109  N.  Y.  473  ;    1888. 


COLLATERAL  TRUSTS  AND  DEBENTURE  INDENTURES  71 

Generally  and  almost  always  in  this  community  it  becomes 
desirable  in  order  to  enhance  their  marketability  that  corporate 
bonds  of  any  important  or  long-term  issue  shall  be  listed  by 
the  New  York  Stock  Exchange. 

To  effect  such  listing  it  is  necessary  to  comply  not  only  with 
the  general  rules  of  law,  but  also  with  the  special  rules  of  the 
Stock  Exchange.  This  lecture  will  now  close  with  a  brief 
consideration  of  those  rules. 

New  York  Stock  Exchange  Rules 

So  far  as  they  affect  the  form  of  the  obligations,  the  rules 
of  the  New  York  Stock  Exchange  are  intended  solely  for  the 
protection  of  the  holders  and  in  the  interest  of  free  trading. 
Just  as  in  the  case  of  the  securities  themselves,  from  time  to 
time  the  rules  have  been  modified  as  experience  has  developed 
difficulties  of  observance.  A  revised  edition  of  the  rules  is  now 
in  preparation  and  is  about  to  be  issued.  Those  who  may  be 
interested  will  find  a  copy  of  the  rules  in  force  always  available 
at  the  Exchange.  In  our  communications  with  the  Com- 
mittee, we  have  found  it  disposed  to  exhibit  a  liberal  purpose  to 
construe  the  rules  broadly,  and,  when  reasonably  necessary,  in 
exceptional  cases,  to  waive  strict  compliance. 

The  objects  to  which  the  rules  tend  are  the  following : 

(1)  That  all  rights  of  the  holders  of  obligations  (other  than 
in  respect  of  the  security)  shall  appear  succinctly  in  the  instru- 
ment itself  and  without  the  necessity  of  recourse  to  any  other 
instrument. 

(2)  That  irrespective  of  provisions  for  other  places,  payment 
and  registration  or  interchange  or  conversion  of  the  bonds  and 
publication  of  notice  of  redemption,  etc.,  shall  be  made  in  the 
Borough  of  Manhattan,  City  of  New  York. 

(3)  That  the  collective  rights  of  the  holders  shall  be  pro- 
tected by  a  trustee  without  adverse  or  divided  interest. 

(4)  That  the  legality  of  the  issuance  of  the  securities  shall  be 
attested  by  reasonable  evidence  and  the  opinion  of  counsel. 


72     PREPARATION  OF  CORPORATE  BONDS,  MORTGAGES 

(5)  That  there  shall  be  a  safeguard  against  forged  or  un- 
authorized issues. 

Many  of  the  provisions  involved  have  been  referred  to  in 
the  preceding  discussion,  but  it  may  be  useful  to  summarize 
them  here  under  the  several  headings  mentioned. 

1.  As  to  the  completeness  of  the  instrument  in  itself,  a 
number  of  specifications  are  urged  upon  corporations  by  the 
Committee  and  generally  are  adopted.    Thus,  it  is  desired 
that  there  shall  appear  in  the  bond  a  summary  statement  of 
the  rights  of  registration  or  interchange  or  conversion  of  bonds, 
of  the  period  and  place  of  publication  of  notice  of  redemption, 
of  the  conditions  of  redemption,  of  the  amount  of  the  issue  and 
of  the  date  of  and  parties  to  the  indenture  under  which  they 
are  issued.     As  to  the  registration  and  transfer,  the  text  of  the 
bonds  relating  thereto  should  omit  reference  to  any  require- 
ment of  entry  on  the  corporate  books.     If  the  bonds  of  the 
issue  may  be  varied  in  respect  of  the  rate  of  interest  or  other 
provisions,  the  bonds  must  have  a  serial  designation  distin- 
guishing one  class  from  the  other. 

If  the  bonds  are  subject  to  redemption,  the  coupons  maturing 
after  the  earliest  date  of  redemption  must  recite  the  promise 
to  pay  "unless  the  bonds  shall  have  been  called  for  previous 
redemption."  In  recent  years  the  Committee  has  been  quite 
firm  in  its  position  that  in  the  case  of  all  new  issues,  all  coupons 
in  form  shall  be  strictly  negotiable,  which  has  led  to  the  abandon- 
ment of  the  clause  at  one  time  generally  incorporated  in  coupons 
to  the  effect  that  they  were  subject  to  the  terms  and  conditions 
of  the  bond  and  the  indenture  under  which  it  was  issued.  Of 
course,  the  independent  character  of  coupons  is  qualified  so 
long  as  they  are  attached  to  the  bond  or  are  in  the  hands  of 
the  same  holder.1 

2.  As  to  the  place  of  exercise  of  their  rights  by  bondholders, 
the  Committee  insists  that  either  by  provision  in  the  obliga- 

1  Watson  v.  Chicago,  Rock  Island  &  Pacific  R.  R.,  169  App.  Div.  (N.  Y.) 
663;  1915. 


COLLATERAL  TRUSTS  AND  DEBENTURE  INDENTURES  73 

tion  when  practicable,  or  otherwise  by  supplemental  agree- 
ment with  the  applicant  for  listing,  there  shall  be  maintained 
in  the  Borough  of  Manhattan  an  office  or  agency  where  the 
bonds  and  coupons  may  be  presented  for  payment  and  where 
all  notices  or  demands  for  registration,  interchange  of  bonds 
or  conversion,  may  be  given  or  made.  Similarly,  it  is  insisted 
that  for  a  specified  period  in  advance  of  any  redemption  date, 
publication  of  notice  of  redemption  shall  be  made  in  newspapers 
published  in  the  Borough  of  Manhattan. 

3.  As  to  the  trustee,  the  general  requirement  of  the  rule  is 
that  there  shall  be  an  independent  trustee  for  each  issue  of 
obligations  by  a  corporation,  and  that  no  trustee  shall  be  an 
officer  or  director  of  the  issuing  corporation.  On  this  point, 
I  do  not  think  that  the  general  opinion  of  counsel  experienced 
in  the  workings  of  corporate  mortgages  accords  with  the  posi- 
tion of  the  Committee.  The  greater  part  of  the  administration 
of  a  corporate  mortgage  is  prior  to  any  default  or  necessity  for 
enforcement  of  the  security.  In  case  of  necessity  for  enforce- 
ment of  the  security,  the  responsible  trust  company,  holding 
conflicting  liens,  will  resign  all  but  a  single  one  in  favor  of 
independent  trustees.  But  as  only  a  few  of  the  many  mortgages 
issued  go  to  default,  and  prior  to  default,  save  in  exceptional 
cases,  there  is  no  real  conflict  of  interest  between  the  holders  of 
prior  liens  and  subordinate  liens,  clearly  it  is  in  the  interest  of 
ease  of  administration  to  have  as  few  trustees  as  possible  rep- 
resenting liens  on  the  same  corporate  property.  Especially  is 
this  so  in  the  case  of  pledges  of  corporate  securities,  such  as 
has  been  made  by  the  United  States  Steel  Corporation  under 
its  indentures  of  1901  and  1903  covering  the  same  collateral 
security,  both  of  which  agreements  name  the  same  trustee. 
Again,  it  is  to  be  remembered  that  the  number  of  trust  com- 
panies in  the  city  of  New  York  —  especially  those  with  experi- 
enced trust  departments  —  is  not  great,  and  I  doubt  whether 
in  the  cases  of  the  large  railroad  corporations  it  would  be  prac- 
ticable to  obtain  separate  corporate  trustees  of  their  general 


74     PREPARATION  OF  CORPORATE  BONDS,  MORTGAGES 

mortgages  and  of  the  many  underlying  mortgages.  This  is 
recognized  by  the  Committee,  and  they  have  not  undertaken 
to  enforce  resignations  of  trusteeships  when  consolidations 
or  mergers  of  the  mortgagors  or  of  the  trust  companies  have 
resulted  in  the  same  trustee  succeeding  to  several  trusts  in  re- 
spect of  the  same  property. 

4.  As  to  the  evidence  of  the  legality  of  issuance  of  the  listed 
securities,  the  requirement  of  the  Committee  is  entirely  reason- 
able that  the  legality  shall  be  attested  by  opinion  of  counsel 
and  by  certified  copies  of  the  corporate  proceedings  and  of  the 
consents  of  the  proper  governmental  authorities  having  juris- 
diction. 

With  the  intent  of  identifying  listed  bonds  even  when  there 
exists  the  right  of  interchange  of  coupon  bonds  and  registered 
bonds,  the  Committee  from  time  to  time  have  made  rules  re- 
quiring a  recital  to  be  indorsed  on  registered  bonds  substan- 
tially in  the  following  form : 

"The  within  bond  is  issued  in  lieu  of  or  in  exchange  for  (a)  coupon 
bond(s)  numbered  *  *  *  for  $1000  (each),  not  contemporaneously 
outstanding,  and  (a)  coupon  bond(s)  bearing  the  said  serial  num- 
ber (s)  will  be  issued  in  exchange  for  this  bond  upon  its  surrender  and 
cancellation." 

But  a  new  difficulty  in  such  identification  was  introduced  by 
the  issue  of  coupon  and  registered  bonds  of  denominations  of 
less  than  $1000  each,  all  denominations  being  interchangeable. 
Various  forms  of  legends  have  been  placed  upon  these  so-called 
"baby"  bonds  in  an  effort  to  identify  them  as  being  issued  in 
lieu  of  a  $1000  bond  of  a  specific  number,  but  the  bookkeeping 
complications  in  endeavoring  to  carry  out  the  various  plans 
have  made  them  generally  impracticable.  At  present  all  that 
the  Stock  Exchange  requires  is  a  recital  that  upon  surrender 
and  cancellation  of  "baby"  bonds  for  that  amount,  there  will 
be  issued  in  exchange  therefor  coupon  bonds  for  $1000,  re- 
served unissued  for  the  purpose. 


COLLATERAL  TRUSTS  AND  DEBENTURE  INDENTURES  75 

It  does  not  seem  necessary  or  advisable  to  set  forth  in  the 
indenture  the  exact  form  of  the  recital,  inasmuch  as  change  in 
custom  may  make  the  requirement  obsolete.  The  proper  way 
would  seem  to  be  to  insert  in  the  indenture  a  provision  that 
"baby"  bonds  may  be  identified  by  number  or  letter  in  accord- 
ance with  such  plan  as  may  be  adopted  by  the  Company  with 
the  approval  of  the  trustee  and  may  have  imprinted  thereon 
a  legend  that  it  has  been  issued  in  lieu  of  or  exchange  for  a 
bond  of  higher  denomination  not  contemporaneously  outstand- 
ing and  the  statement  that  such  a  bond  is  reserved  for  exchange, 
together  with  such  other  specification  in  the  premises  as  may 
be  required  to  comply  with  the  rules  of  any  Stock  Exchange 
or  to  conform  to  usage. 

5.  To  guard  against  unauthorized  issues,  it  is  required  further 
that  the  certification  and  registration  are  to  be  made  by  an 
acceptable  trust  company  and  that  the  engraving  of  the  securi- 
ties and  protection  of  the  plates  shall  be  in  the  hands  of  an 
acceptable  engraving  company. 

The  other  items  of  the  rules  in  respect  to  the  form  of  the 
application  for  listing,  balance  sheets,  list  of  officers,  transfer 
agents,  registrars  and  agreements  to  be  made  by  the  corpora- 
tion with  the  Exchange  as  to  notices  of  corporate  actions  affect- 
ing security  holders  and  similar  matters,  are  set  forth  in  the 
rules  of  the  Stock  List  Committee,  a  copy  of  which  may  be 
obtained  at  the  Exchange  at  any  time.  The  Secretary  of  the 
Committee  will  always  be  found  desirous  of  conferring  with 
counsel  while  the  form  of  the  securities  and  other  instruments 
are  in  course  of  preparation,  with  the  view  of  obtaining  con- 
formity with  the  rules. 


While  it  has  been  the  purpose  of  this  paper  to  indicate  sub- 
stantially all  the  points  to  be  developed  in  the  preparation  of 
a  corporate  bond  and  mortgage  or  indenture,  it  is  to  be 
remembered  that  it  is  not  intended  as  a  treatise,  and  that  the 


76     PREPARATION  OF  CORPORATE  BONDS,  MORTGAGES 

r 

authorities  cited  are  such  only  as  bear  upon  points  of  particular 
interest.  It  has  not  been  practicable  to  outline  all  the  many 
variations  possible  in  such  indentures,  or  to  quote  the  custom- 
ary phraseology  of  the  instruments  now  in  general  use.  Copies 
of  the  more  recent  trunk-line  railroad  mortgages  are  generally 
available  for  examination  at  the  offices  of  investment  bankers 
or  at  the  principal  offices  of  the  mortgagor  companies,  if  not 
otherwise  obtainable.  With  such  assistance,  and  the  exercise 
of  diligence  and  care,  the  preparation  of  effective  and  system- 
atic corporate  obligations  and  trust  indentures  should  be  a 
task  much  less  formidable  than  it  appeared  to  me  when  I 
undertook  such  work  some  thirty-five  years  ago. 


THE  FORECLOSURE  OF  RAILROAD  MORTGAGES 
IN   THE   UNITED   STATES   COURTS 

Paper  read  February  23,  1916,  before  the  Association  of  the  Bar  of  the  City  of 
New  York  by  James  Byrne 

ON  January  1,  1912,  the  Judicial  Code  of  the  United  States, 
under  which  the  circuit  court  was  abolished  and  the  jurisdiction 
of  the  district  court  was  enlarged,  went  into  operation.  As  the 
almost  invariable  method  in  recent  years  of  proceeding  to  fore- 
close a  railroad  mortgage  has  been  in  substance  the  same  be- 
fore and  since  the  Code,  in  describing  it  I  shall  speak  in  the 
present  tense  as  though  there  were  no  Code ;  and  then  tell  the 
details  in  which  the  Code  affects  it. 

I  take  the  case  of  an  insolvent  railroad  company  operating 
in  different  states  a  railroad  built  up  by  purchases,  leases  and 
consolidations ;  and  assume,  as  the  fact  is  in  all  but  very  rare 
instances,  that  it  wishes  its  property  to  be  put  in  the  hands  of 
receivers. 

The  procedure  is  as  follows : 

A  general  creditor,  at  the  suggestion  of  the  railroad  com- 
pany, files  a  bill  in  behalf  of  himself  and  all  other  creditors, 
against  the  company  in  the  proper  United  States  Circuit  Court, 
in  which  he  alleges  that 

(a)  the  defendant  is  a  corporation  organized  and  existing  under 
the  laws,  and  a  citizen,  of  the  state  in  which  the  suit  is  brought  and 
the  complainant  is  a  citizen  of  some  other  state ; 

(b)  the  principal  operating  offices  of  the  defendant  and  a  material 
portion  of  its  railroad  are  in  the  district  in  which  the  bill  is  filed ; 

(c)  the  defendant  is  indebted  to  the  complainant ; 

(d)  the  defendant  is  insolvent;  and,  as  there  are  many  creditors 
whose  debts  have  matured  or  are  about  to  mature  and  the  defendant 
is  unable  to  pay  them,  if  the  court  does  not  take  the  assets  of  the 
defendant  into  its  possession,  attachments  will  be  levied,  judgments 

77 


78          FORECLOSURE   OF   RAILROAD   MORTGAGES 

obtained  and  executions  issued,  and  the  railroad  of  the  defendant 
thereby  dismembered  and  its  property  wasted. 

(e)  the  matter  in  controversy  exceeds  exclusive  of  interest  and 
costs  the  sum  or  value  of  three  thousand  dollars. 

The  prayer  of  the  bill  is  that  the  court  will  administer  the 
assets  of  the  defendant  and  appoint  a  receiver  pending  the  suit. 

The  company  files  an  answer  admitting  the  allegations  and 
joining  in  the  prayer  of  the  bill. 

On  the  pleadings  the  court  enters  an  order  appointing  a 
receiver. 

This  bill  is  called  the  primary  or  principal  bill ;  the  suit  the 
primary  or  principal  suit ;  and  the  court  in  which  it  is  brought 
the  court  of  primary  jurisdiction. 

The  creditor  then  files  ancillary  bills  in  every  judicial  district 
in  which  any  part  of  the  railroad  lies  or  in  which  there  is  any 
substantial  amount  of  other  property  of  the  railroad  company. 
In  an  ancillary  bill  it  is  as  necessary  to  allege  diversity  of  citi- 
zenship as  in  the  principal  bill.1  Such  a  bill  contains  the  same 
allegations  as  the  primary  bill  except  that  it  omits  (b) 2 ;  and  in 
addition  it  alleges  that  the  primary  bill,  a  copy  of  which  is  an- 

1  As  to  the  necessity  of  a  bill  in  one  jurisdiction  brought  in  aid  of  a  bill  in 
another  meeting  all  the  requirements  of  an  original  bill,  see  the  opinion  of  Mr. 
Justice  Harlan  in  Mercantile  Trust  Co.  v.  Kanawha  &  O.  Ry.  Co.,  39  Fed.,  337 ; 
1889  ;  and  the  comments  upon  this  case  of  Judge  Lurton  in  New  York  P.  &  O.  R. 
Co.  v.  New  York  L.  E.  &  W.  R.  Co.,  58  Fed.,  268,  278-80 ;  1893.     See  also  the 
statement  in  Coltrane  v.  Templeton,  106  Fed.,  370, 374,  C.  C.  A.,  4th  Circuit,  1901, 
that  the  bill  brought  in  aid  of  the  primary  bill  is  an  "auxiliary"  bill  and  not 
an  "ancillary"  bill. 

2  It  may  be  that  a  portion  of  the  railroad  of  the  defendant  is  in  a  state  of 
which  the  railroad  company  is  not  a  citizen.     In  that  case  the  ancillary  bill 
changes  (a)  of  the  primary  bill  to  an  allegation  that  the  complainant  and  the 
defendant  are  citizens  of  different  states.     The  appearance  of  the  defendant 
would  in  any  case  be  a  waiver  of  the  objection  that  suit  must  be  brought  in 
the  district  of  which  either  complainant  or  defendant  is  a  resident ;   but  where 
the  property  is  in  the  district  no  such  objection  lies,  as  in  that  case  a  citizen  of 
one  state  may  bring  suit  against  a  citizen  of  another  state,  although  neither  of 
them  is  a  resident  of  the  district  and  the  defendant  may  be  served  by  publica- 
tion.    Jellinik  v.  Huron  Copper  Mining  Co.,  177  U.  SM  1 ;  1900;  Section  57  of 
the  Judicial  Code  superseding  the  act  of  March  3,  1875,  C.  137,  Sec.  8,  18  Stat. 
at  L.  472. 


FORECLOSURE   OF   RAILROAD   MORTGAGES          79 

nexed,  has  been  filed  in  the  court  of  primary  jurisdiction ;  that 
the  defendant  has  answered  it  admitting  all  its  allegations  and 
joining  in  its  prayer ;  that  the  court  of  primary  jurisdiction  has 
appointed  receivers  of  the  property  of  the  defendant ;  and  that 
some  of  the  property  of  the  defendant  is  in  the  district  in  which 
the  ancillary  suit  is  brought.  The  bill  prays  as  in  the  primary 
bill ;  and  in  addition  asks  that  the  court  will  appoint  as  receivers 
under  it  the  receivers  appointed  by  the  court  of  primary  juris- 
diction. 

The  defendant  files  answers  in  all  the  ancillary  suits  similar 
to  the  answer  in  the  primary  suit;  and  the  different  courts 
enter  orders  appointing  as  receivers  the  same  persons  named 
by  the  court  of  primary  jurisdiction. 

Some  days  or  weeks  or  months  later  the  trustee  of  the  mort- 
gage which  is  to  be  foreclosed  files  bills  in  the  courts  in  which 
the  creditor's  suits  are  pending,  and  the  receivers  appointed 
under  the  creditor's  bills  are  appointed  receivers  also  under  the 
foreclosure  bills. 

Why  do  things  take  this  course?  Why  is  it  that  the  filing 
of  a  creditor's  bill  and  the  appointment  of  a  receiver  under  it  so 
almost  invariably  precede  the  foreclosure  suit  as  practically  to 
be  a  part  of  it? 

For  three  reasons : 

1.  As  a  receiver  under  a  bill  to  foreclose  a  mortgage  is 
receiver  only  of  the  mortgaged  property,  it  may  be  that,  be- 
cause it  is  unmortgaged,  property  useful,  perhaps  almost  essen- 
tial, to  the  best  operation  of  the  road  will  not  come  into  his 
possession.  Such  property  may  be  seized  at  law  by  creditors 
pursuing  their  legal  remedies ;  and  it  may  be  claimed  that  the 
liens  which  they  obtain  by  judgment,  attachment  or  execution 
extend  to  property  which  the  receiver  claims  under  the  mort- 
gage. These  troubles  are  avoided  by  beginning  with  a  credi- 
tor's bill ;  for  the  receiver  under  that  bill  is,  of  course,  receiver 
of  all  the  property  of  the  railroad  company,  mortgaged  or  un- 


80          FORECLOSURE   OF   RAILROAD   MORTGAGES 

mortgaged,  and  the  administration  of  the  property,  its  marshal- 
ing and  distribution  are  all  in  the  equity  court.1 

2.  The  mortgage  is  not  always  in  a  condition  to  be  fore- 
closed.   The  railroad  company  may  find  itself  without  money 
to  pay  its  bills  at  a  time  when  no  interest  is  due  on  the  mortgage 
and  there  is  no  default  of  any  kind  justifying  the  beginning 
of  a  foreclosure  suit.     If  a  creditor's  suit  is  not  begun  in  the 
federal  courts,  not  only  may  operation  be  interfered  with  by 
levies  under  attachments  and  executions,  but  a  state  court 
may  appoint  a  receiver.     State  courts  are  in  many  ways  not  as 
well  suited  as  the  federal  courts  for  the  foreclosure  of  a  mort- 
gage of  a  railroad  company  or  the  administration  of  its  assets, 
particularly  where  the  railroad  is  in  several  states.     Federal 
courts  have  had  much  greater  experience  in  such  litigation; 
their  rules  and  procedure  are  comparatively  settled  and  are  sub- 
stantially the  same  in  all  districts  and  circuits ;  their  relations 
with  one  another  are  more  intimate  than  those  of  state  courts ; 
and  they  accept  more  easily  than  state  courts  the  position  of 
ancillary  courts. 

3.  There  may  be  all  sorts  of  jurisdictional  difficulties  in  the 
way  of  a  foreclosure  in  the  federal  courts.     The  trustee  of  the 

1  The  following  method  of  getting  all  the  assets  of  a  corporation*  into  the 
possession  of  the  court  under  a  bill  praying  for  the  foreclosure  of  a  mortgage, 
without  a  separate  creditor's  bill,  was  recently  adopted.  The  trustee  filed  a 
bill  setting  up  the  clause  now  common  in  trust  deeds  that  upon  default  in  the 
payment  of  principal  the  mortgagee  should  be  entitled  to  recover  judgment 
for  the  amount  due ;  alleging  that  in  order  to  preserve  the  unity  of  the  busi- 
ness and  to  carry  it  on  to  the  best  advantage  a  receiver  should  be  appointed  of 
all  the  property  of  the  defendant  corporation ;  and  praying  that  judgment 
should  be  entered  in  favor  of  the  trustee  for  the  whole  amount  due,  that  the 
mortgage  should  be  foreclosed,  that  the  property  covered  by  the  mortgage 
and  any  remaining  property  should  be  sold  in  separate  parcels,  and  that  the 
proceeds  of  all  such  sales  should  be  distributed  among  those  whom  the  court 
should  find  to  be  entitled  thereto.  On  the  consent  of  the  defendants  a  receiver 
of  all  its  property  was  appointed.  The  bill  is  a  combined  foreclosure  bill  and 
creditor's  bill.  Under  Rule  26  of  the  new  equity  rules  the  plaintiff  may  join 
in  one  bill  as  many  equity  causes  of  action  as  he  has  against  the  defendant. 

*  Not  a  railroad  corporation.  References  will  include  cases  in  which  the  mort- 
gages are  not  railroad  mortgages,  the  principle  involved  in  them  being  applicable 
to  the  subject  treated  in  this  paper. 


FORECLOSURE   OF   RAILROAD   MORTGAGES          81 

mortgage  and  the  railroad  company  may  be  citizens  of  the  same 
state.  They  are  almost  sure  to  be  when  the  railroad  company 
is  a  citizen  of  the  State  of  New  York;  and  when  it  is  not,  it 
often  happens,  owing  to  the  growth  in  importance  of  trust  com- 
panies of  other  states,  laws  requiring  a  local  trustee,  and  the 
union  of  railroad  companies  into  a  consolidated  corporation 
existing  under  the  laws  of  several  states,  that  the  trustee,  or 
where  there  are  several  trustees  one  of  them,  is  a  citizen  of  a 
state  of  which  the  railroad  company  is  also  a  citizen. 

Take  the  case  of  a  railroad  company  operating  a  railroad 
from  a  point  in  Ohio  to  a  point  in  Missouri :  it  may  be  a  con- 
solidated corporation  existing  under  the  laws  of  Ohio,  Indiana, 
Illinois  and  Missouri.  It  is  then  for  jurisdictional  purposes  in 
Ohio  a  corporation  and  citizen  of  Ohio ;  in  Indiana  a  corporation 
and  citizen  of  Indiana ;  in  Illinois  a  corporation  and  citizen  of 
Illinois ;  and  in  Missouri  a  corporation  and  citizen  of  Missouri.1 
It  has  made  a  mortgage  to  two  trustees,  one  a  Chicago  trust 
company  and  another,  a  citizen  of  Missouri,  an  individual ;  the 
interest  on  the  bonds  secured  by  the  mortgage  has  not  been 
paid,  and  the  trustees  wish  to  foreclose  the  mortgage  in  the 
federal  courts.  The  impossibility  of  maintaining  suits  in  the 
federal  courts  of  all  four  states  is  seen  at  once.  In  Ohio  and 

1  Railway  Co.  v.  Whitton,  13  Wall.  270 ;  1871.  Muller  v.  Dows,  94  U.  S.  444 
447 ;  1876.  Clark  v.  Barnard,  108  U.  S.  436,  448,  452  ;  1883.  See  Southern  Ry. 
Co.  v.  Allison,  190  U.  S.  326,  1903,  to  the  effect  that  where  a  statute  of  North 
Carolina  provided  that  a  foreign  railroad  company  desiring  to  carry  on  business 
within  the  state  must  comply  with  certain  provisions  and  on  compliance  should 
become  a  domestic  corporation,  a  foreign  corporation  did  not  by  complying  with 
the  statute  become  a  citizen  of  North  Carolina  for  purposes  of  federal  jurisdiction. 
In  Muller  v.  Dows,  94  U.  S.  444,  the  Court  says :  "A  corporation  itself  can 
be  a  citizen  of  no  state  in  the  sense  in  which  the  word  'citizen'  is  used  in  the 
Constitution  of  the  United  States.  .  .  .  For  the  purposes  of  jurisdiction  it 
is  conclusively  presumed  that  all  the  stockholders  are  citizens  of  the  state 
which  by  its  laws  created  the  corporation.  It  is  therefore  necessary  that  it  be 
made  to  appear  that  the  artificial  being  was  brought  into  existence  by  the  law 
of  some  state  other  than  that  of  which  the  adverse  party  is  a  citizen."  It  is,  of 
course,  usual  to  speak  of  a  corporation  as  a  citizen  of  the  state  under  the  laws 
of  which  it  is  organized. 


82          FORECLOSURE   OF   RAILROAD   MORTGAGES 

Indiana  the  federal  courts  have  jurisdiction,  for  of  both  those 
states  the  railroad  company  is,  and  each  of  the  trustees  is  not, 
a  citizen ;  but .  in  Illinois  and  Missouri  the  federal  courts 
have  not  jurisdiction,  for  the  Chicago  trust  company  and 
the  railroad  company  are  both  citizens  of  Illinois,  and  the 
individual  trustee  and  the  railroad  company  are  both  citizens 
of  Missouri. 

Another  case  where  a  jurisdictional  difficulty  arises  is  where 
a  junior  mortgagee  is  a  citizen  of  the  same  state  as  the  trustee 
of  a  senior  mortgage.  If  the  latter  begins  a  foreclosure  suit, 
it  is  for  practical  purposes  absolutely  necessary  that  the  junior 
mortgagee  should  be  a  party  defendant,  but  if  the  foreclosure  bill 
makes  it  a  defendant,  the  jurisdiction  of  the  court  is  ousted. 

All  these  jurisdictional  difficulties  in  the  way  of  a  foreclosure 
suit  disappear  when  the  first  step  is  a  creditor's  bill;  for  a 
creditor  may  be  chosen  to  file  the  bill  who  is  not  a  citizen  of 
any  of  the  states  of  which  any  of  the  defendants  are  citizens  or 
by  any  possibility  may  be  claimed  to  be.  And  when  a  federal 
court  takes  possession  by  its  receiver  under  the  creditor's  bill 
of  the  property  of  the  railroad  company,  such  possession  draws 
to  that  court  all  suits  and  proceedings  with  respect  to  that 
property,  regardless  of  whether  or  not  in  such  suits  or  pro- 
ceedings there  is  a  diversity  of  citizenship.1  A  mortgagee 
applies  in  the  creditor's  suit  for  permission  to  file  a  bill  to 
foreclose  and  when  permission  is  given  he  proceeds  exactly  as 
in  an  ordinary  foreclosure  suit. 

This  method  of  getting  the  assets  of  an  insolvent  railroad 
corporation  into  the  federal  courts  and  of  foreclosing  its  mort- 
gages there,  is  so  direct  and  effective,  the  question  arises  why  it 
is  only  in  recent  years  that  its  use  has  become  so  universal. 

There  are  two  reasons : 

First,  the  doctrine  that  the  mere  fact  of  possession  of  the  res 
by  a  federal  court  gives  a  mortgagee  a  right  to  foreclose  in  that 

1  Wabash  Railroad  v.  Adelbert  College,  208  U.  S.,  38,  54 ;  1908. 


FORECLOSURE   OF   RAILROAD   MORTGAGES          83 

court  and  that  the  foreclosure  suit  when  once  begun  proceeds 
in  all  respects  as  an  entirely  independent  suit,  while  it  follows 
logically  from  the  principle  that  the  court  which  first  takes  juris- 
diction has  the  right  to  exercise  exclusive  jurisdiction  and  from 
the  rules  of  equity  pleading,  was  not  widely  or  fully  compre- 
hended until  the  time  of  the  decisions  in  Morgan's  Co.  v.  Texas 
Central  Railway,  137  U.  S.,  171,  201 ;  1890;  Compton  v.  Jessup, 
68  Fed.,  263,  279-282 ;  1895 ;  and  Continental  Trust  Company  v. 
Toledo  St.  L.  &  K.  C.  R.  Co.,  82  Fed.,  642 ;  1897.  In  the  Con- 
tinental Trust  Company  case  Judge  Taft  after  saying  that  the 
jurisdiction  of  the  federal  court  over  the  foreclosure  suit  de- 
pended upon  the  possession  of  the  res  under  the  creditor's  bill, 
added,  p.  645 : 

"Such  dependence  does  not  throw  both  suits  into  hotchpot,  and 
dispense  with  the  ordinary  rules  of  pleading  and  practice  as  to  parties 
proper  and  necessary  to  each  cause  of  action.  *  *  *  The  parties  to  the 
original  bill  have  no  more  right  to  intervene  in  the  dependent  cause 
than  if  the  court  had  independent  jurisdiction  thereof.  Hence  the 
rule  as  to  who  may  appear  to  a  foreclosure  bill  and  file  answers  is  the 
same  here  as  if  the  bill  had  in  fact  been  an  independent  bill.  In  other 
words,  the  relation  between  the  two  suits  is  principal  and  ancillary 
only  so  far  as  that,  without  possession  of  the  res  in  the  former  suit,  the 
court  would  have  no  jurisdiction  of  the  latter;  but,  having  thus 
acquired  and  thus  maintaining  its  jurisdiction  in  the  second  suit,  the 
court  proceeds  in  it  without  further  regard  to  the  pleading  or  course  of 
the  principal  action." 

Second,  the  creditor's  bill  is  demurrable  on  the  ground  that 
it  does  not  show  that  the  complainant  has  exhausted  his  remedy 
at  law  by  obtaining  judgment  and  return  of  execution  thereon 
unsatisfied ;  and  while  the  general  belief  always  was  that  such 
a  lack  of  equity  was  available  only  to  the  defendant,  and  to  him 
only  on  the  threshold  of  the  litigation,  it  was  feared  that  a  de- 
fendant who  had  not  made  the  objection  at  the  beginning  might 
be  allowed  to  do  so  later,  or  that  some  intervening  creditor  or 
stockholder  might  set  up  the  defense,  and  get  the  proceedings 
dismissed. 


84         FORECLOSURE   OF   RAILROAD  MORTGAGES 

These  fears  were  ended  by  the  cases  of  Hollins  v.  Brierfield 
Company,  150  U.  S.,  371,  and  Central  Trust  Company  v.  Me- 
George,  151  U.  S.,  129,  decided  in  1893. 

In  the  Hollins  case  the  court  said  that  while  simple  contract 
creditors  of  an  insolvent  corporation  "  cannot  come  into  a  court 
of  equity  to  obtain  the  seizure  of  the  property  of  then-  debtor 
and  its  application  to  the  satisfaction  of  their  claims,"  neverthe- 
less "  defenses  existing  in  equity  suits  may  be  waived  .  .  .  and 
when  waived  the  cases  stand  as  though  the  objection  never 
existed";  and  that  the  defense  that  the  complainants  had  not 
exhausted  their  legal  remedies  was  waived  if  not  made  in 
limine. 

In  the  Central  Trust  Company  case  the  court  held  that  where 
the  defendant  corporation  by  entering  an  appearance  and  join- 
ing in  the  prayer  of  the  bill  for  the  appointment  of  a  receiver 
had  waived  the  objection  that  the  suit  was  not  brought  in  the 
district  whereof  it  was  an  inhabitant ;  inasmuch  as  the  corpora- 
tion itself  had  submitted  to  the  jurisdiction  of  the  court,  it  was 
not  open  to  any  intervening  stockholder  or  creditor  to  set  up 
the  defense  thus  waived.  The  principle  of  the  case  is  broad 
enough  to  cover  any  jurisdictional  defense  which  can  be 
waived  such  as  that  the  complainant  has  not  exhausted  its 
legal  remedies.1 

Before  the  Hollins  case  it  was  usual  for  some  creditor  to 
obtain  judgment  by  confession,  and  after  execution  had  been 
issued  and  returned  unsatisfied,  to  file  a  judgment  creditor's  bill. 
This  procedure  was  troublesome,  especially  when  the  railroad 
ran  through  many  different  districts,  in  each  of  which  the  pre- 
liminary proceedings  took  place.  There  was  frequent  delay 
which  gave  creditors  a  chance  to  obtain  a  preference  through 
attachments  or  executions ;  and  defenses  were  interposed  con- 
troverting the  validity  of  the  issuing  and  return  of  the  execution 
and  denying  the  authority  to  confess  judgment  of  the  officers 
of  the  company  who  had  done  so. 

1  Horn  v.  P&re  Marquette  Railroad  Company,  151  Fed.,  626;  1907. 


FORECLOSURE   OF   RAILROAD   MORTGAGES          85 

Sometimes  when  a  creditor  took  the  chance  of  filing  a  bill 
before  having  exhausted  his  legal  remedies,  he  would  file  the 
bill  as  a  general  creditor  and  join  a  stockholder  as  co-complain- 
ant and  add  charges  of  mismanagement  in  the  hope  that  if  it 
failed  as  a  creditor's  bill,  it  might  be  sustained  as  a  stock- 
holder's bill. 

A  method  of  its  own  was  adopted  by  the  Wabash,  St.  Louis 
&  Pacific  Railway  Company  in  1884.  The  company  itself  was 
the  complainant,  naming  as  defendants  the  trustees  of  its 
general  mortgage,  the  trustees  of  underlying  mortgages,  the 
owners  of  railroads  of  which  it  was  the  lessee,  in  all  some  ninety 
defendants.  The  bill  alleged  that  the  railroad  company  was 
practically  insolvent;  that  its  line  of  railroad  extended  into 
many  districts ;  that  it  was  a  consolidated  corporation  existing 
under  the  laws  of  many  states;  that  it  had  placed  mortgages 
upon  all  of  its  property ;  that  it  had  bought  different  portions  of 
its  line  from  different  railroad  companies,  which  had  all  mort- 
gaged their  properties  before  the  complainant  had  acquired 
them,  and  that  it  was  the  lessee  of  different  lines,  mortgages 
upon  which  had  been  made  by  the  lessors  before  leasing  them  ; 
that  its  entire  property  was  being  operated  by  another  railroad 
company ;  that  it  had  a  large  floating  debt,  and  was  unable  to 
pay  this  debt  or  the  interest  upon  it,  and  that  it  would  be  un- 
able to  pay  the  interest  on  some  of  its  mortgages ;  that  suits 
would  be  brought  in  different  districts  in  which  creditors  would 
levy  attachments  and  issue  executions  on  judgments  and  its 
entire  railroad  system  would  be  disrupted  to  the  great  loss  of 
creditors,  stockholders,  and  the  public.1  Upon  this  bill  the  court 
appointed  receivers. 

There  was  widespread  criticism  of  these  proceedings.  The 
Missouri  Supreme  Court  in  a  similar  case  2  said  that  the  appoint- 
ment was  void  and  could  be  attacked  collaterally ; 

1  Wabash,  St.  Louis  &  Pacific  Railway  Company  v.  Central  Trust  Company 
22  Fed.,  138;  1884. 

8  State  ex  rel.  Merriam  v.  Ross,  122  Mo.,  435;  1894. 


86          FORECLOSURE   OF   RAILROAD   MORTGAGES 

".  .  .  it  is  simply  a  petition  by  a  debtor  for  the  appointment  of  a 
receiver  to  manage  and  carry  on  its  business,  so  that  its  creditors  can- 
not enforce  their  legal  rights  in  the  courts  of  the  country,  and  not  a 
petition  stating  a  cause  of  action  either  at  law  or  in  equity  in  which, 
as  incident  thereto,  a  receiver  might  be  appointed.  The  filing  of  that 
petition  no  more  instituted  an  actual  controversy  between  contending 
suitors  in  court  than  would  the  filing  of  a  copy  of  the  Lord's  prayer." 

The  Supreme  Court  of  the  United  States,  however,  never 
condemned  the  procedure  in  the  Wabash  case.  On  the  con- 
trary, in  a  case  l  growing  out  of  the  Wabash  litigation,  the  court 
stated  the  provisions  of  the  bill  at  length  and  said : 

"The  bill  was  obviously  framed  upon  the  theory  that  an  insolvent 
railroad  corporation  has  a  standing  in  a  court  of  equity  to  surrender 
its  property  into  the  custody  of  the  court,  to  be  preserved  and  disposed 
of  according  to  the  rights  of  its  various  creditors  and,  in  the  meantime, 
operated  in  the  public  interest." 

and  later  2  cited  the  case  in  a  way  to  indicate  that  it  regarded 
the  statement  just  quoted  as  an  approval  of  the  theory. 

Why  counsel  adopted  the  method  they  used  in  the  Wabash 
case  it  is  hard  to  see.  It  would  seem  from  an  opinion  of  Judge 
Baxter3  to  have  been  in  the  hope  that  on  the  bill  and  the  cross-bill 
of  the  trustees  of  the  general  mortgage  the  court  might  be  in- 
duced to  make  a  decree  directing  a  sale  of  all  of  the  property 
of  the  company  free  from  underlying  liens  and  distribution  of 
the  proceeds  among  all  persons  interested  in  some  equitable 
manner  to  be  determined  after  the  sale,  and  that  the  making  of 
such  a  decree  would  force  all  parties  in  interest  to  assent  to  a 
speedy  reorganization. 

Notwithstanding  the  criticism  of  the  Wabash  method,  it  was 
not  infrequently  followed;  and  a  very  good  reason  for  follow- 
ing it  arose  when  the  Circuit  Court  of  Appeals  for  the  Ninth 
Circuit  decided  in  Chapman  v.  Atlantic  Trust  Company,  119 

1  Quincy  M.  &  P.  Co.  v.  Humphreys,  145  U.  S.,  82,  95 ;  1892. 

2  Re  Metropolitan  Railway  Receivership,  208  U.  S.,  90,  111 ;  1908. 

3  Wabash,  St.  Louis  &  Pacific  Railway  Company  v.  Central  Trust  Co.,  22  Fed. 
138;  1884. 


FORECLOSURE   OF   RAILROAD   MORTGAGES          87 

Fed.  257,  1902,  145  Fed.  820,  1906,  that  the  complainant  in  a 
suit  in  which  a  receiver  was  appointed  was  liable  for  the  in- 
debtedness of  the  receiver  incurred  to  preserve  the  estate  and 
for  his  compensation  and  lawyers'  fees,  to  the  extent  that  the 
assets  of  the  receivership  were  insufficient. 

If  this  decision  was  correct,  there  was  no  reason  why  the 
complainant  should  not  be  liable  for  the  indebtedness  of  the 
receiver  for  whatever  purpose  contracted  if  it  exceeded  the 
amount  realized  from  the  assets.  What  such  a  liability  might 
be  no  one  could  tell.  In  the  case,  for  instance,  of  the  Oregon 
Pacific  Railroad  Company  there  were,  I  believe,  receivers'  cer- 
tificates to  the  amount  of  a  million  dollars  or  so  upon  which 
the  holders  received  only  an  insignificant  dividend.  The  pos- 
sibility that  a  trustee  for  bondholders  who  had  filed  a  bill  for 
foreclosure,  or  a  creditor  for  five  or  ten  thousand  dollars  who 
had  consented  to  let  his  name  be  used  as  complainant  in  a 
creditor's  bill,  might  ultimately  be  held  for  some  huge  amount, 
was  enough  to  make  any  one  who  considered  the  subject  think 
with  favor  of  the  Wabash  method  of  obtaining  a  receivership. 
If  to  be  a  complainant  was  to  run  such  a  risk  the  most  suitable 
complainant  undoubtedly  was  the  insolvent  railroad  company 
itself. 

Fortunately,  the  Supreme  Court  in  Chapman  v.  Atlantic 
Trust  Company,  208  U.  S.,  360,  1908,  reversed  the  Circuit  Court 
of  Appeals,  and  held  that  the  mere  fact  that  a  complainant  had 
asked  and  obtained  the  appointment  of  a  receiver  was  not  suffi- 
cient to  justify  the  court  in  holding  him  liable  for  debts  of  the 
receivership.  This  case  and  the  case  of  Re  Metropolitan  Rail- 
way Receivership,  208  U.  S.  90,  1908  —  in  which  the  Supreme 
Court  held  that  so  long  as  the  indebtedness  of  the  defendant 
to  the  complainant  was  real  and  the  diversity  of  the  citizenship 
of  the  parties  was  real,  there  was  a  controversy  of  which  the 
federal  courts  had  jurisdiction  and  the  parties  were  not  guilty 
of  collusion  in  arranging  with  one  another  for  the  bringing  of 
the  suit,  for  the  admission  of  the  allegations  of  the  bill,  or  for  the 


88          FORECLOSURE   OF   RAILROAD   MORTGAGES 

appointment  of  receivers  —  have  disposed  of  all  the  fears  and 
doubts  which  the  most  cautious  counsel  felt  in  proceeding  by 
general  creditor's  bill  to  bring  the  property  of  an  insolvent 
corporation  into  the  federal  courts.1 

Having  now  shown  the  usual  method  by  which  an  insolvent 
railroad  corporation  is  placed  in  the  hands  of  a  receiver  and 
the  reasons  why  that  method,  after  trial  of  others,  has  been 
adopted,  I  take  up  the  procedure  more  in  detail. 

When  the  interests  of  creditors  and  stockholders  really  re- 
quire a  receivership,  it  is  of  the  utmost  importance,  in  order  to 
prevent  unfair  preferences  or  interference  with  the  operation  of 
the  road  by  seizure  under  attachments  of  rolling  stock,  that  all 
necessary  applications  to  the  courts  should  be  made  as  quickly 
and  quietly  as  possible. 

If  the  railroad  and  all  the  other  property  of  the  company  are 
in  a  single  district,  it  is  a  comparatively  simple  matter:  the 
filing  of  a  bill  and  answer  and  the  appointment  of  a  receiver  in 
that  district.  But,  except  in  the  case  of  street  railway  com- 
panies, the  property  of  a  railroad  company  is  usually  in  many 
districts;  and  therefore  it  is  necessary  to  file  many  bills  and 
obtain  under  every  bill  a  receivership  order.  This  necessity 
arises  out  of  the  fact  that  the  jurisdiction  of  a  federal  court  is 

1  See  also  Dickerman  v.  Northern  Trust  Company,  176  U.  S.,  181,  192,  1900, 
"if  a  person  takes  up  a  bona  fide  residence  in  another  State,  he  may  sue  in  the 
Federal  court,  notwithstanding  his  purpose  was  to  resort  to  a  forum  of  which  he 
could  not  have  availed  himself  if  he  were  a  resident  of  the  State  in  which  the 
court  was  held" ;  Blair  v.  City  of  Chicago,  201  U.  S.  400,  448-9,  1906,  "As  to 
the  conspiracy  to  get  the  case  into  the  Federal  Court,  with  a  view  to  the  deci- 
sion of  the  rights  of  the  parties  therein,  we  are  not  aware  of  any  principle  which 
prevents  parties  having  the  requisite  citizenship  and  a  justiciable  demand  from 
seeking  the  Federal  courts  for  redress.  ...  It  is  true  that  the  judgments 
were  taken  and  the  receivers  appointed  the  same  day,  and  it  is  quite  likely  that 
the  receiverships  were  in  view  when  the  judgments  were  taken  and  that  prepa- 
rations had  been  made  in  that  direction,  but  we  perceive  in  this  no  legal  objec- 
tion to  the  jurisdiction  of  the  court" ;  and  In  re  Cleland,  218  U.  S.,  120,  1910, 
holding  that  a  federal  court  had  jurisdiction  of  a  suit  where  the  shares  of  stock 
owned  by  the  complainant  had  been  transferred  out  and  out  to  him  for  the 
express  purpose  of  enabling  him  to  sue  in  that  court. 


FORECLOSURE   OF   RAILROAD   MORTGAGES          89 

confined,  in  the  absence  of  some  statute  extending  it,  within 
the  territorial  limits  of  a  judicial  district 1  and  that  as  a  chan- 
cery receiver  takes  no  title  to  property,  but  is  only  an  officer  of 
the  court  which  appoints  him,  he  has  no  jurisdiction  which 
that  court  has  not. 

In  Great  Western  Mining  Company  v.  Harris,  198  U.  S.,  561, 
1905,  the  Supreme  Court,  after  saying  that  it  was  held  in  Booth  v. 
Clark,  17  How.  (U.  S.),  322, 1854,  that  in  the  absence  of  some  con- 
veyance or  statute  vesting  the  property  in  him,  a  receiver  cannot 
sue  to  recover  property  in  courts  of  a  foreign  jurisdiction  even 
when  authorized  by  the  court  which  appointed  him 2  adds,  page 

577: 

"  It  is  doubtless  because  of  the  doctrine  "  of  Booth  v,  Clark,  "that 
the  practice  has  become  general  in  the  courts  of  the  United  States, 
where  the  property  of  a  corporation  is  situated  in  more  than  one 

1  Section  742  of  the  Revised  Statutes  (now  Section  55  of  the  Judicial  Code) 
is  an  example  of  a  statute  extending  the  jurisdiction  of  a  federal  court  beyond 
the  limits  of  the  district. 

"Any  suit  of  a  local  nature,  at  law  or  in  equity,  where  the  land  or  other 

subject  matter  of  a  fixed  character  lies  partly  in  one  district  and  partly  in 

another,  within  the  same  State,  may  be  brought  in  the  [circuit]  district 

court  of  either  district;    and  the  court  in  which  it  is  brought  shall  have 

jurisdiction  to  hear  and  decide  it,  and  to  cause  mesne  or  final  process  to 

be  issued  and  executed,  as  fully  as  if  the  said  subject  matter  were  wholly 

within  the  district  in  which  such  court  is  constituted." 

A  suit  to  foreclose  a  mortgage  is  a  suit  of  a  local  nature,  and  so,  as  was 

decided  by  Judge  Lurton  in  Horn  v.  Pere  Marguette  Railway  Company,  151  Fed., 

626,  1907,  is  a  creditors'  bill  to  administer  the  property  of  an  insolvent  railroad. 

In  that  case  Judge  Lurton  held  that  as  the  Pere  Marquette  Railroad  Company 

was  in  both  districts  in  Michigan,  a  receiver  appointed  in  a  creditor's  suit  in  one 

district  had  jurisdiction  and  control  of  the  property  of  the  company  in  the  other. 

2  A  statutory  receiver  does  not  always  get  title  to  property,  but  he  does 
very  frequently,  and  when  the  cases  or  textbooks  speak  of  a  statutory  receiver 
in  contradistinction  to  a  chancery  receiver  they  generally  mean  a  receiver  in 
whom  all  of  the  property  of  the  corporation  vests  by  the  terms  of  the  statute 
which  authorizes  his  appointment  —  a  receiver,  for  instance,  appointed  under 
the  provisions  of  Sections  65-68,  of  the  New  Jersey  Corporation  Law,  or  of 
Sections  106  and  191  of  the  General  Corporation  Law  of  New  York.     In  Keatley 
v.  Furey,  226  U.  S.,  399,  403,  1912,  the  Court  said,  "The  effect  of  such  a  pro- 
vision" —  that  a  receiver  should  have  title  —  "need  not  be  considered  in  this 
case.    In  some  instances,  at  least,  it  would  be  enforced  outside  of  the  State. 
Bernheimer  v.  Converse,  206  U.  S.,  516,  534 ;   1907.    Converse  v.  Hamilton,  224, 
U.  S.  243,  257 ;  1912."     In  the  cases  cited,  it  was  held  that  a  statutory  receiver 
might  sue  in  a  foreign  jurisdiction. 


90          FORECLOSURE   OF   RAILROAD   MORTGAGES 

jurisdiction,  to  appoint  ancillary  receivers  of  the  property  in  such 
separate  jurisdictions.  It  is  true  that  the  ancillary  receiverships  are 
generally  conducted  in  harmony  with  the  court  of  original  jurisdiction, 
but  such  receivers  are  appointed  with  a  view  of  vesting  control  of 
property  rights  in  the  court  in  whose  jurisdiction  they  are  located." 

It  follows  from  what  has  been  said  that  the  property  of  the 
railroad  company  in  all  districts  the  jurisdiction  of  which  is  for- 
eign to  the  districts  where  a  receiver  has  been  appointed  is  sub- 
ject to  the  liens  of  judgments,  executions  and  attachments  to  the 
same  extent  as  if  no  receiver  had  been  appointed  in  any  district. 
The  interval,  therefore,  between  the  appointment  of  the  re- 
ceivers in  the  principal  district  and  their  appointment  in  all  other 
districts  where  there  is  property  of  the  company  should  be 
shortened  as  much  as  possible.  To  this  end  action  is  taken  as 
follows : 

When  the  directors,  principal  officers  and  counsel  of  a  rail- 
road company  see  that  a  receivership  is  inevitable,  some  credi- 
tor is  told  who  can  be  trusted  not  to  take  advantage  of  the  in- 
formation in  order  to  get  a  preference  for  himself  by  attachment 
or  other  process  and  is  asked  to  file  a  general  creditor's  bill. 
The  creditor's  lawyer  and  the  counsel  for  the  railroad  company 
then  prepare  the  necessary  papers. 

The  principal  bill,  the  answer  to  it  and  the  order  appointing 
receivers  under  it  are  first  prepared.  They  are  entitled  in  the 
circuit  court  (it  will  be  remembered  that  I  am  assuming  the 
Judicial  Code  which  abolished  the  circuit  court  has  not  gone 
into  effect)  for  the  district  where  the  principal  operating  offices 
of  the  railroad  company  and  some  material  part  of  the  mortgaged 
railroad  are  situated.  For  that  court  has  been  held  by  four  jus- 
tices of  the  Supreme  Court1  to  be  the  court  of  primary  jurisdic- 
tion and  of  principal  decree.  Ancillary  bills  to  be  filed  in  the 
courts  of  all  districts  where  any  part  of  the  railroad  or  other 
real  property  or  money  or  securities  are  situated,  answers  to 
them,  and  orders  appointing  receivers  under  them  are  then  pre- 

1  Farmers  Loan  &  Trust  Co.  v.  Northern  Pacific  R.  Co.,  72  Fed.  26 ;  1896. 


FORECLOSURE    OF   RAILROAD   MORTGAGES          91 

pared.  Each  set  of  papers  is  entitled  in  the  court  in  which  they 
are  to  be  used. 

When  all  these  papers  have  been  prepared,  a  meeting  of  the 
directors  of  the  railroad  company  is  held,  at  which  the  different 
bills  and  answers  and  orders  are  presented  and  a  resolution  is 
passed  directing  counsel  to  appear  in  the  principal  and  ancillary 
suits,  to  file  answers  substantially  in  the  form  of  those  that  have 
been  prepared,  to  consent  to  the  entering  of  the  proposed  orders, 
and  in  general  to  do  all  things  necessary  and  proper  to  the 
appointment  of  receivers  in  all  jurisdictions  where  any  of 
the  assets  of  the  company  are  situated. 

Counsel  for  the  complainant  and  the  defendant  then  take 
the  papers  in  the  suit  in  the  court  of  primary  jurisdiction  and  in 
the  ancillary  suits  in  the  other  courts  of  the  same  circuit  to  one 
of  the  circuit  judges  of  that  circuit.  Usually  it  is  of  importance, 
and  the  court  is  willing,  that  some  one  connected  with  the  rail- 
road in  an  operating  capacity  should  be  a  receiver.  The  court 
ordinarily  appoints  as  a  co-receiver  some  one  not  previously  con- 
nected with  the  railroad  of  whose  fitness  it  has  personal  knowl- 
edge. When  the  court  decides  upon  the  receivers  it  signs  the 
order  of  appointment  and  delivers  the  papers  to  the  clerk  of  the 
court  or  mails  them  to  him  or  gives  thetoi  to  counsel  to  deliver 
to  him.  The  pleadings  in  the  ancillary  suits  are  then  verified 
and  the  ancillary  orders  appointing  receivers  are  signed,  and 
the  assistants  of  counsel  take  them  to  the  clerks  of  the  various 
courts  to  be  filed.1 

1  In  Horn  v.  Pere  Marquette  R.  Co.,  151  Fed.,  626,  1907,  Judge  Lurton  said  in 
regard  to  an  order  which  he  as  circuit  judge  had  made  at  his  chambers  in  Cin- 
cinnati in  a  suit  in  the  United  States  Circuit  Court  for  the  Western  District  of 
Michigan : 

"An  order  appointing  a  receiver  made  at  chambers  .  .  .  presupposes 
a  pending  case.  The  objection  that  there  was  no'  pending  suit  when  the 
order  in  this  case  was  made  is  a  misconception.  I  am  not  at  all  inclined 
to  agree  that  when  the  complainant's  bill  and  the  defendant's  answer 
were  exhibited  to  me  at  Cincinnati,  and  an  application  made  by  both 
parties  for  the  appointment  of  a  receiver,  that  this  lodging  of  the  plead- 
ings with  me  and  this  consent  by  the  defendants  was  not  such  a  com- 
mencement of  the  suit  and  filing  of  the  bill  as  to  make  my  order  relate 


92          FORECLOSURE   OF   RAILROAD   MORTGAGES 

Meanwhile  other  assistants  are  waiting  near  a  circuit  judge 
in  each  of  the  other  circuits  where  any  substantial  portion  of  the 
mortgaged  property  is  situated  with  the  papers  in  the  ancillary 
suits  which  are  to  be  filed  there.  As  soon  as  a  telegram  or  a 
telephone  message  tells  them  that  the  suit  in  the  principal  court 
has  been  begun  and  receivers  appointed,  the  pleadings  in  the 
ancillary  suits  are  verified  and  presented  to  the  circuit  judge 
having  jurisdiction  and  he  signs  orders  appointing  receivers  in 
all  the  courts  in  his  circuit.  The  pleadings  and  the  orders  are 
then  sent  with  all  possible  speed  to  be  filed  in  the  offices  of  the 
clerks  of  the  proper  courts. 

How  has  the  procedure  I  have  been  describing  been  affected 
by  the  Judicial  Code?  As  follows: 

First.  —  Formerly  creditor's  suits  and  suits  to  foreclose  mort- 
gages were  brought  in  the  circuit  court.  That  court  having 
been  abolished  by  the  Code,  they  are  now  brought  in  the  dis- 
trict court. 

Second.  —  Formerly  a  circuit  judge  could  sign,  wherever  he 
happened  to  be  in  his  circuit,  orders  appointing  receivers  in 
the  principal  suit,  and  in  the  ancillary  suits  for  all  the  districts 
in  his  circuit,  no  matter  how  many  states  those  districts  might 
be  in.1  Now  he  cannot  do  this,  and  if  to-day  counsel  deems  it 
advisable  in  the  case  of  an  insolvent  railroad  company  to  file  a 
creditor's  bill  in  each  judicial  district  through  which  the  road 
runs,  he  should  have  the  receivership  order  in  each  district 
signed  by  a  judge  —  whether  the  district  judge  or  a  cir- 
cuit judge  designated  to  act  as  a  district  judge  —  actually 

to  the  very  time  when  I  acted  at  Cincinnati.  Universal  Savings  &Trust 
Co.  v.  Stoneburner,  113  Fed.,  251 ;  51  C.  C.  A.,  208;  (1902).  To  save  the 
question  I  made  my  order  to  take  effect  when  the  bill  should  be  filed  at 
Grand  Rapids,  and  directed  the  clerk  to  then  issue  the  necessary  process. 
Thus  the  order  was  signed  by  me  on  December  4th.  It  was  provisional 
upon  the  actual  filing  of  the  bill,  and  became  effective  then  only.  The 
pleadings  were  then  intrusted  to  one  of  the  counsel  to  be  lodged  in  the 
clerk's  office  at  Grand  Rapids  and  this  was  done.  ..." 
1  Horn  v.  Pere  Marguette  R.  Co.,  151  Fed.  626 ;  1907. 


FORECLOSURE   OF   RAILROAD   MORTGAGES          93 

present,  and  having  jurisdiction,  in  that  district.  The  reason 
is  this : 

When  the  Judicial  Code  abolished  the  circuit  court,  it  pro- 
vided that  the  circuit  judges  should  continue  to  hold  their 
offices  during  the  terms  for  which  appointed.  The  duty  of  these 
judges  is  to  hear  and  decide  cases  in  the  circuit  court  of  ap- 
peals and  to  do  whatever  is  necessary  in  connection  with  such 
appeal  work.  For  the  performance  by  them  of  any  other  judi- 
cial act  some  specific  authority  is  needed.  Section  18  of  the 
Code  provides  that  "Whenever  in  the  judgment  of  the  senior 
circuit  judge  of  the  circuit  in  which  the  district  lies,  or  of  the 
circuit  justice  assigned  to  such  circuit,  or  of  the  Chief  Justice, 
the  public  interest  shall  require,  the  said  judge  or  associate 
justice  or  Chief  Justice  shall  designate  and  appoint  any  circuit 
judge  of  the  circuit  to  hold  said  district  court."  Section  19 
provides  that  "  all  the  acts  and  proceedings  in  the  courts  held  by 
him,  or  by  or  before  him,  in  pursuance  of  said  provisions,  shall 
have  the  same  effect  and  validity  as  if  done  by  or  before  the  dis- 
trict judge  of  the  said  district."  As  a  circuit  judge,  by  such 
designation,  gets  the  powers  of  a  district  judge  and  no  others, 
it  seems  clear  that  no  matter  in  how  many  districts  he  may 
have  been  designated  to  act  as  a  district  judge,  a  circuit  judge 
has  no  longer  the  power  he  formerly  had  to  sign  orders  when 
in  one  district  of  his  circuit  in  suits  pending  in  other  districts.1 

Third.  —  Section  56  provides  that  if  a  receiver  is  appointed 
in  a  suit  where  the  land  or  other  property  of  a  fixed  character, 
the  subject  of  the  suit,  lies  within  different  states  in  the  same 

1  In  Horn  v.  Pere  Marquette  R.  Co.,  Judge  Lurton  intimated  that  it  was  a 
sufficient  answer  to  the  objection  that  the  power  of  a  circuit  judge  could  not  be 
exercised  validly  outside  of  the  particular  district  in  which  the  order  was  to  be 
entered  that  the  defendant  company  had  joined  in  the  application  for  the  order 
and  therefore  neither  it  nor  its  creditors  nor  stockholders  could  object.  See 
also  Continental  Trust  Co.  v.  Toledo,  St.  L.  &  K.  C.  R.  Co.,  99  Fed.,  171 ;  1900. 
In  the  same  way,  it  may  perhaps  be  said  that  where  the  parties  consent  to  a 
district  judge  or  a  circuit  judge  designated  to  act  as  a  district  judge,  signing  an 
order  out  of  the  district  where  he  has  jurisdiction  and  where  the  order  is  to  be 
entered,  the  order  cannot  be  subsequently  objected  to  by  any  of  the  parties  or 
any  one  claiming  under  them. 


94          FORECLOSURE    OF   RAILROAD   MORTGAGES 

judicial  circuit,  the  receiver  shall  upon  giving  bond  immediately 
be  vested  with  full  jurisdiction  and  control  over  all  the  property, 
the  subject  of  the  suit  lying  or  being  within  such  circuit ;  sub- 
ject, however,  to  the  disapproval  of  such  order,  within  thirty 
days  thereafter,  by  the  circuit  court  of  appeals  for  such  circuit, 
or  by  a  circuit  judge  thereof,  after  notice  to  adverse  parties 
and  opportunity  to  be  heard ;  and  subject  also  to  the  filing  in 
each  district  court  of  the  circuit  in  which  any  of  the  property 
may  lie  or  be,  within  ten  days  thereafter,  of  a  duly  certified 
copy  of  the  bill  and  of  the  order  of  appointment.  The  Act 
further  provides  that  in  any  such  case  in  which  a  receiver  shall 
be  appointed,  process  may  issue  and  be  executed  within  any 
district  of  the  circuit  in  the  same  manner  and  to  the  same 
extent  as  if  the  property  were  wholly  within  the  same  district ; 
but  orders  affecting  such  property  shall  be  entered  of  record  in 
each  district  in  which  the  property  affected  may  lie  or  be. 

Since  this  took  effect,  the  general  practice  where  a  railroad  is 
in  several  circuits  is  this :  the  complainant  files  the  principal 
bill  in  the  primary  district ;  the  railroad  company  answers  and 
joins  in  the  prayer  of  the  bill ;  the  circuit  judge  designated  to 
act  in  that  district  or  the  district  judge  signs  in  that  district  the 
order  appointing  receivers  and  it  is  there  entered;  the  com- 
plainant forthwith  files  certified  copies  of  the  bill  and  order  in 
all  the  district  courts  of  the  circuit  where  there  is  property ;  the 
complainant  also  files,  as  soon  as  the  order  appointing  receivers 
has  been  made  in  the  primary  district,  an  ancillary  bill  in  one 
district  of  each  of  the  other  circuits  and  the  railroad  company 
files  the  usual  answer ;  the  district  judge  or  designated  circuit 
judge  signs  in  that  district  an  ancillary  order  appointing  re- 
ceivers and  it  is  there  entered,  and  the  complainant  files  certified 
copies  of  the  ancillary  bill  and  order  in  all  other  districts  of  that 
circuit  where  there  is  property. 

This  is  the  practice  adopted  in  the  receiverships  of  the  Chi- 
cago, Rock  Island  and  Pacific  Railway  Company,  the  St.  Louis 
and  San  Francisco  Railroad  Company,  the  Missouri,  Kansas  & 


FORECLOSURE    OF   RAILROAD   MORTGAGES          95 

Texas  Railway  Company,  the  Missouri  Pacific  Railway  Com- 
pany and  the  Western  Pacific  Railway  Company.  In  all  these 
cases  except  that  of  the  last  named  company  the  receivership  is 
under  the  general  charge  of  a  circuit  judge  designated  to  act  as 
a  district  judge. 

As  the  powers  of  chancery  receivers  arising  from  the  mere 
fact  of  their  appointment  are  few,  it  is  customary  for  the  court 
in  the  order  of  appointment  to  give  them  express  authority  to 
do  the  things  that  experience  has  shown  they  ought  to  have  the 
right  to  do  if  the  receivership  is  to  produce  the  best  results. 
The  order  appointing  receivers  under  the  creditor's  bill  author- 
izes them : 

(1)  to  manage  and  operate  the  railroad  and  other  properties;    and 
to  exercise  the  franchises  and  to  discharge  the  public  duties  of  the  rail- 
road company. 

(2)  to  institute  and  prosecute  in  their  own  names  or  in  the  name 
of  the  railroad  company  all  such  suits  as  may  be  necessary  for  the 
protection  of  the  trust  estate  and  to  defend  all  actions  instituted  against 
them  and  to  defend  any  suits  to  which  the  railroad  company  is  a  party, 
the  defense  of  which  is  necessary  for  the  protection  of  the  estate ; 

(3)  to  pay  wages  and  debts  for  current  operating  expenses  and 
supplies  incurred  within  six  months  prior  to  the  appointment  of  the 
receivers ; 

and  directs : 

(4)  the  officers,  directors  and  employees  of'  the  railroad  company 
and  all  other  persons  to  deliver  up  to  the  receivers  all  moneys  and 
other  property  under  their  control ; 

(5)  the  railroad  company  and  its  officers  and  employees  and  all 
other  persons  to  refrain  from  interfering  with  the  possession  or  manage- 
ment of  the  property  or  interfering  in  any  way  with  the  receivers  in 
the  discharge  of  their  duties ; 

(6)  the  receivers  to  give  a  bond  for  the  faithful  performance  of  their 
duties. 

The  following  orders  are  sometimes  part  of  the  receivership 
order ;  if  not  they  are  entered  almost  immediately : 


96          FORECLOSURE   OF   RAILROAD   MORTGAGES 

(1)  An  order  naming  the  counsel  of  the  receivers.      Such 
counsel  are  chosen  by  the  receivers  subject  to  the  approval  of 
the  court. 

(2)  An  order  requiring  the  receiver  to  file  monthly  reports 
and  appointing  a  master  to  examine  and  pass  upon  them. 

(3)  An  order  requiring  all  creditors  to  present  claims  to  a 
designated  master  before  a  fixed  date ;  and  directing  that  notice 
be  published  in  certain  newspapers;   that  a  copy  of  the  order 
be  mailed  to  creditors  who  are  on  the  books  of  the  company ; 
that  any  creditor  be  allowed  to  object  to  the  claim  of  any  other 
creditor;   and  that  a  hearing  be  had  before  the  master  on  the 
date  fixed  in  the  order  or  on  such  other  date  as  the  master  may 
name. 

Notwithstanding  the  order  of  appointment  may  authorize  the 
payment  of  all  preferred  claims,  the  only  preferential  payments 
the  receivers  actually  make  without  a  special  order  are  of  wages 
due  employees  and  traffic  balances  of  small  amounts.  Traffic 
balances  of  large  amounts  the  receivers  pay  promptly,  but  not 
till  they  have  obtained  the  permission  of  the  court.  Payments 
of  supply  claims  and  the  like  are  not  made  until  the  right  to  a 
preference  has  been  passed  upon  by  a  master  and  his  report 
has  been  confirmed.  It  is  well  at  the  outset  to  have  an  order 
entered  directing  all  creditors  demanding  a  preference  to  make 
the  demand  when  presenting  their  claims  to  the  master,  and 
permitting  all  other  creditors  to  be  heard  in  opposition  to  the 
demand.  If  such  an  order  is  not  promptly  made,  creditors 
claiming  a  preference  will  file  petitions  of  intervention ;  and  in 
many  courts  orders  allowing  them  to  intervene  will  be  entered 
almost  as  a  matter  of  course,  with  the  effect  of  unnecessarily 
multiplying  proceedings.  The  practice  adopted  in  this  district 
is  to  require  the  individual  creditors  to  file  their  claims  with  a 
statement  of  the  preference  they  deem  themselves  entitled  to, 
and,  where  there  are  many  creditors,  to  permit  committees  to 
intervene  who  represent  different  classes  of  creditors  claiming 


FORECLOSURE   OF   RAILROAD   MORTGAGES          97 

a  preference,  contract  creditors,  tort  creditors,  and  so  on.  In 
the  New  York  City  Railway  receivership  the  intervening  com- 
mittees were  made  parties  defendant  to  the  litigation,  thus 
obtaining  the  right  to  be  heard  on  all  questions,  not  merely  on 
the  question  of  their  right  to  a  preference. 

It  is  of  the  highest  importance  that  at  the  very  earliest 
moment  there  should  be  in  the  files  of  the  court,  for  its  guidance 
and  that  of  all  parties  in  interest,  as  full  and  clear  a  report  of 
what  the  court  has  in  its  hands  for  administration  as  the  re- 
ceivers and  their  counsel  can  quickly  prepare  with  the  aid  of 
the  accounting  and  other  departments  of  the  railroad  company. 
This  report  should  tell  what  the  assets  and  liabilities  of  the 
company  are,  what  mortgages  are  on  the  property,  what  they 
cover,  when  they  mature  and  what  defaults  will  accelerate  their 
maturity,  when  the  interest  falls  due,  what  car  trust  agreements 
there  are,  how  much  has  been  paid  on  them,  what  payments 
remain  to  be  made,  what  rolling  stock  the  company  owns  and 
whether  it  is  too  much  or  too  little,  what  the  earnings  and  ex- 
penditures have  been  for  some  years  of  the  railroad  as  a  whole, 
of  leased  lines,  of  branches,  and  of  various  divisions  of  the  road. 
The  report  should  not  confine  itself  to  the  past,  but  should  give 
the  judgment  of  the  receivers  as  to  the  prospects  for  the  future 
and  make  suggestions  as  to  the  best  way  to  get  new  business  or 
hold  what  the  road  already  has.  The  court  sometimes  author- 
izes the  receivers  to  hire  experts  to  aid  them  in  the  preparation 
of  such  reports. 

One  of  the  first  questions  presented  to  receivers  is  whether  or 
not  they  shall  pay  interest  on  mortgage  bonds,  non-payment  of 
which  may  accelerate  the  maturing  of  the  principal.  Some  of 
the  mortgages  may  be  liens  on  all  of  the  railroad,  others  may  be 
divisional  mortgages,  as  they  are  called,  with  liens  only  on  a 
portion  of  the  road.  Some  may  cover  parts  of  the  main  line, 
the  loss  of  which  would  be  irreparable;  others  may  cover 


98          FORECLOSURE    OF   RAILROAD   MORTGAGES 

branches  not  essential  to  the  system,  but  valuable  as  feeders. 
The  general  practice  is  to  pay  the  interest  due  on  mortgages 
upon  the  main  line  senior  to  the  mortgage  being  foreclosed; 
upon  valuable  links;  upon  branches  which  are  clearly  worth 
more  than  the  mortgages  upon  them ;  and  even  upon  mort- 
gages covering  parts  of  the  property  the  value  of  which  is 
doubtful,  until  the  stockholders  and  general  creditors  or  bond- 
holders under  junior  mortgages  have  a  short  time  in  which  to 
make  up  their  minds  what  the  best  interests  of  the  property 
require.1 

But  the  receivers  may  be  quite  sure  that  interest  ought  to  be 
paid  and  find  they  have  no  money  to  spare  for  that  purpose. 
In  that  case  they  present  to  the  court  a  petition  giving  all  the 
facts  and  arguments  which  have  convinced  them ;  and  ask  that 
they  be  directed  to  pay  the  interest  and  for  that  purpose  to 
borrow  money  and  issue  receivers5  certificates.  The  court  sets 
down  the  petition  for  hearing  and  directs  that  notice  of  hear- 
ing be  given  to  all  parties  and  to  the  trustees  of  the  mort- 
gages on  which  it  is  a  question  of  paying  interest  and  of 
junior  mortgages,  whether  such  trustees  are  parties  or  not. 
The  court,  if  it  directs  interest  on  bonds  to  be  paid  and  re- 
ceivers' certificates  to  be  issued,  orders  that  the  certificates  shall 
state  on  their  face  the  lien  which  the  court  has  given  them, 
usually  a  lien  just  subsequent  to  the  lien  of  the  mortgage  secur- 
ing the  bonds.  To  give  the  certificates  a  prior  lien  would  be  to 
pay  the  bondholders  their  interest  ,at  the  expense  of  their 
mortgage.2 

1  In  Guaranty  Trust  Co.  v.  International  Steam  Pump  Company,  231  Fed., 
594,  595,  1916,  Judge  Mayer  said  that  when  interest  becomes  due  on  a  mort- 
gage during  a  receivership  under  a  creditor's  bill,  and  a  failure  to  pay  it  may 
entitle  the  trustee  to  declare  the  principal  of  the  bonds  due,  the  receivers  ought 
to  apply  to  the  court  for  instructions. 

2  Of  course  the  bondholders  themselves  for  various  reasons  such  as  a  desire 
to  put  off  foreclosure  and  sale  until  times  of  business  depression  pass  away 
and  meanwhile  to  receive  their  interest,  may  be  willing  that  the  lien  of  the  cer- 
tificates should  be  placed  ahead  of  their  mortgage.     If  they  are  not  willing 
that  the  certificates  should  be  paid  ahead  of  their  bonds  either  out  of  net  in- 
come to  which  they  are  otherwise  entitled  or  out  of  the  corpus,  the  bondholders 


FORECLOSURE   OF   RAILROAD   MORTGAGES          99 

The  court  has  power  to  issue  certificates  without  notice  to 
anyone.1  Before,  however,  they  are  allowed  to  displace  any 
existing  lien, . —  before,  that  is,  they  are  paid  at  the  expense  of 
any  existing  lien,  —  the  lienor  must  be  given  a  hearing.  At  the 
hearing  it  is  not  enough  for  him  to  show  that  he  did  not  have 

or  their  representatives  should  see  that  in  the  order  and  in  the  certificates  it  be 
declared  that  the  lien  of  the  certificates  is  subordinate  to  that  of  the  mort- 
gage, both  upon  income  and  corpus,  and  that  the  certificates  are  not  to  be  paid 
out  of  either  until  after  the  payment  in  full  of  the  principal  and  interest  of  the 
bonds.  The  importance  of  fully  and  explicitly  defining  the  rights  of  the  cer- 
tificate holders  and  the  bondholders,  is  shown  by  the  case  of  American  Trust 
Co.  v.  Metropolitan  Steamship  Co.,  183  Fed.,  250;  1910;  affirmed  190  Fed.,  113; 
1911 ;  C.  C.  A.,  First  Circuit.  There,  receivers'  certificates  had  been  issued  to 
raise  money  in  order  to  pay  interest  on  bonds ;  the  sale  under  foreclosure  of  the 
mortgaged  property  had  not  produced  enough  to  pay  the  bonds,  principal  and 
interest,  in  full ;  a  large  amount  of  net  earnings  had  been  accumulated  subsequent 
to  the  appointment  of  receivers  in  the  suit  to  foreclose  the  mortgage  securing  the 
bonds.  The  court  held  that  the  receivers'  certificates  were  payable  out  of  the 
net  earnings  ahead  of  the  amounts  still  remaining  due  on  the  bonds,  notwith- 
standing the  order  and  the  certificates  both  provided  that  the  lien  on  the 
mortgaged  property  of  the  certificates  should  be  subordinate  and  inferior  to 
the  lien  of  the  mortgage  securing  the  bonds.  There  is  language  in  the  opinion 
of  the  court  of  appeals,  page  116,  which,  it  may  be  argued,  means  that  even  if 
the  order  and  certificates  had  said  in  so  many  words  that  the  mortgage  was  to 
be  prior  to  the  certificates  in  lien  upon  the  income  as  well  as  to  the  corpus, 
nevertheless,  the  court  would  have  ordered  the  certificates  to  be  paid  out  of  the 
income  ahead  of  the  bonds.  And  in  Union  Trust  Co.  v.  Illinois  Midland  Co.-, 
117  U.  S.,  434,  480-1,  the  court  said  that,  notwithstanding  the  orders  and  certifi- 
cates provided  that  certain  certificates  should  have  priority  over  other  cer- 
tificates and  receivers'  debts,  the  final  decree  in  that  case  should  deny  them 
such  priority.  It  would  seem  in  fairness  to  purchasers  and  all  parties  that 
the  rights  apparently  given  by  the  language  of  the  certificates  should  not  sub- 
sequently be  altered.  If  it  be  said  that  such  alteration  may  from  the  necessities 
of  the  case  sometimes  be  necessary,  the  power  to  make  it  should  be  reserved  by 
the  court  on  the  face  of  the  certificates. 

1  "Though  prior  notice  to  persons  interested,  by  notifying  them  as  parties, 
first  requiring  them  to  be  made  parties  if  they  are  not,  is  generally  the  better 
way,  yet  many  circumstances  may  be  judicially  equivalent  to  prior  notice.  A 
full  opportunity,  as  in  this  case,  to  be  heard  on  evidence,  as  to  the  propriety  of 
the  expenditures  and  of  making  them  a  first  lien,  is  judicially  equivalent." 
Union  Trust  Co.  v.  Illinois  Midland  Co.,  117  U.  S.,  434  at  456 ;  1886.  "It  was 
for  the  court  to  say  whether  the  Canal  &  Irrigation  Company  should  be  kept  on 
its  feet  by  moneys  borrowed  or  obtained  under  its  orders  by  the  receiver.  The 
wishes  of  the  parties  could  not  control  as  to  such  matters.  Indeed  they  need 
not  in  strictness  have  been  consulted  as  to  what  should  be  done  from  time  to 
time  in  the  management  of  the  property."  Atlantic  Trust  Co.  v.  Chapman,  208 
U.  S.,  360,  371 ;  1908. 


100       FORECLOSURE   OF   RAILROAD   MORTGAGES 

notice  before  the  certificates  were  issued.  He  must  show  such 
objections  to  the  merits  of  the  order  as  would  have  availed  him 
if  presented  to  the  court  before  the  order  was  entered.  "The 
receiver  and  those  lending  money  to  him  on  certificates  issued 
on  orders  made  without  prior  notice  to  parties  interested,  take 
the  risk  of  the  final  action  of  the  court,  in  regard  to  the  loans."  1 
As  a  practical  matter  the  court  nearly  always  directs  notice  to 
be  given  to  persons,  whether  parties  or  not,  whose  liens  may  be 
affected  by  the  certificates,  for  whatever  the  power  of  the  court 
may  be,  bankers  hesitate  to  buy  certificates  unless  all  persons, 
who  at  any  time  may  have  a  right  to  be  heard  on  the  question 
of  their  priority,  are  heard  before  they  are  issued. 

Very  frequently  when  the  receivers  under  a  creditor's  bill 
take  possession  of  a  railroad,  they  find  there  are  unpaid  taxes, 
interest  is  running  at  a  high  rate,  and  heavy  penalties  are  being 
incurred.  If  the  court  deems  it  essential  to  act  at  once,  it  will 
authorize  certificates  to  be  issued  without  notice  to  mortgagees, 
with  the  same  lien  as  the  tax  levies.  There  is,  of  course,  noth- 
ing unfair  about  this.  It  may  be,  however,  that  the  issuing  of 
such  certificates  will  be  a  breach  of  some  condition  of  a  per- 
fectly well  secured  mortgage,  and  the  trustee  of  that  mortgage 
may  be  thus  enabled  to  foreclose  for  the  face  amount  of  the 
bonds  secured  by  it,  although  the  bonds  may  be  selling  in  the 
market  for  sixty  or  seventy  per  cent  of  their  par  value.  For 
that  reason  the  certificates  should  not  be  given  a  lien  ahead  of 
any  such  mortgage,  even  if  otherwise  they  can  only  be  sold  at  a 
discount. 

A  question  which  a  receiver  ought  to  consider  very  promptly 
is  what  contracts  he  wishes  to  adopt  because  whatever  the 
effect  may  be  upon  the  railroad  corporation  of  a  disaffirmance, 
the  receiver  has  an  absolute  right  to  disaffirm,  and  it  is  his  duty 
to  disaffirm,  any  executory  contracts  that  are  not  beneficial. 

1  Union  Trust  Company  v.  Illinois  Midland  Co.,  117  U.  S.f  434  at  456 ;  1886. 


FORECLOSURE   OF   RAILROAD 

This  brings  me  to  the  question  which  arises  where  the  insol- 
vent railroad  company  is  the  lessee  of  other  railroads  and  the 
entire  system  is  in  the  hands  of  receivers  of  the  lessee.  What 
are  the  rights  of  the  lessor  and  the  rights  and  duties  of  the 
receiver  ? 

The  New  York  Court  of  Appeals  has  held  1  that  the  "  prin- 
ciples which  govern  the  liability  of  an  assignee  of  a  lease  seem 
to  be  applicable  to  the  case  of  a  receiver ;"  and  therefore  the 
taking  possession  of  the  leased  road  by  the  receiver  of  the  lessee 
makes  him  liable  to  pay  the  rental  fixed  in  the  lease  during  his  oc- 
cupation. This  is  not  the  law  of  the  federal  courts.  That  law 
is  stated  thus : 2  "If  the  order  of  the  court,  under  which  the  re- 
ceiver acts,  embraces  the  leasehold  estate,  it  becomes  his  duty, 
of  course,  to  take  possession  of  it.  But  he  does  not,  by  taking 
such  possession,  become  assignee  of  the  term,  in  any  proper 
sense  of  the  word.  He  holds  that,  as  he  would  hold  any  other 
personal  property  involved,  for  and  as  the  hand  of  the  court 
and  not  as  assignee  of  the  term."  Nor,  the  court  adds,  does 
actual  operation  of  the  leased  railroad  by  the  receiver  render 
him  liable  under  the  covenants  of  the  lease  even  for  the  time 
that  he  operates  the  property.  He  has  a  reasonable  tune  to 
decide  whether  as  receiver  he  shall  adopt  the  lease. 

The  subject  was  thoroughly  discussed  by  the  Circuit  Court 
of  Appeals  of  the  Second  Circuit  in  the  New  York  City  street 
railway  litigation.3  The  court  held  in  substance  that  during 
the  trial  period  of  operation  of  a  leased  road,  the  receiver  was 
holding  for  the  lessee  or  the  lessor  according  as  he  ultimately 
adopted  or  rejected  the  lease  —  a  logical  conclusion  from  the 
principle  so  often  stated  by  the  Supreme  Court,  recently  in 
Atlantic  Trust  Company  v.  Chapman,  208  U.  S.,  360,  1908,  that  a 
receiver  is  not  appointed  in  behalf  of  any  particular  person,  but 
"for  the  benefit  of  all  parties  who  may  establish  rights  in  the 

1  Woodruff  v.  Erie  Railway  Company,  93  N.  Y.,  609,  624 ;  1883. 

2  Quincy  M.  &  P.  Co.  v.  Humphreys,  145  U.  S.,  82,  98 ;  1892. 

3  Pennsylvania  Steel  Co.  v.  New  York  City  Railway  Co.,  198  Fed.,  721,  728-34 ; 
1912. 


102        FORECLOSURE   OF   RAILROAD   MORTGAGES 

cause."  When  the  receiver  elects  not  to  adopt  a  lease,  it 
follows  that  the  court  during  the  trial  period  has  been  oper- 
ating for  the  lessor;  that  the  receiver  therefore  is  not  bound 
to  pay  rent  for  the  trial  period  but  only  (in  the  absence  of 
special  equities  —  which  may  justify  a  larger  payment  — )  to 
turn  over  to  the  lessor  the  net  amount  earned  by  the  leased  road 
during  operation ;  that  where  there  are  no  net  earnings  and  the 
leased  road  has  been  operated  by  a  receiver  at  an  actual  loss, 
as  in  the  case  before  the  court,  the  lessor,  not  the  lessee,  must 
bear  that  loss. 

Whether  the  estate  of  the  lessor  could  be  charged  with  the 
loss  to  the  displacement  of  mortgage  liens,  the  Court  said  was 
not  before  it,  but  it  intimated  that  it  agreed  with  the  special 
master  who  had  held  that  the  lessor  could. 

Illustrations  of  the  special  equities  which  might  require  the 
payment  by  the  receiver  of  a  reasonable  rental  regardless  of 
the  fact  that  the  leased  property  did  not  actually  earn  it  are  a 
depot  or  terminal  earning  nothing  but  useful  to  the  system, 
and  "feeders"  and  connecting  lines,  not  themselves  earning 
large  amounts,  but  furnishing  valuable  business  to  the  lessee. 

The  court  said  that  if  the  lessor  does  not  acquiesce  in  the 
court  operating  its  railroad,  "  if  it  knock  at  the  door  of  the  court 
and  demand  back  its  property,"  it  is  in  a  position  to  demand 
the  rental  stipulated  in  the  lease.1  This  holding  is  in  accord- 
ance with  a  decision  of  Judge  Jenkins  in  the  Northern  Pacific  case2 

1  Any  important  demand  made  upon  a  receiver  not  only  should  be  carefully 
considered  by  the  receiver  but  should  be  communicated  by  him  to  all  parties  in 
interest  in  order  that  whether  the  demand  is  granted  or  refused  action  may  be 
taken  only  after  they  have  had  an  opportunity  to  consider  the  consequences. 
In  one  case  where  the  receiver  did  not  pay  the  installments  of  the  purchase  price 
of  rolling  stock  under  a  car  trust  agreement  but  kept  possession  of  it  notwith- 
standing occasional  not  too  emphatic  demands  for  its  surrender,  when  the  decree 
of  sale  was  entered,  it  directed  that  the  entire  proceeds  of  the  sale  of  the  rail- 
road should  be  applied  if  necessary  to  pay  the  amount  due  for  the  cars  —  and 
nothing  but  the  appearance  of  a  totally  unexpected  bidder  at  the  sale  saved 
the  bondholders  from  seeing,  as  the  result  of  three  years  operation  by  the  court, 
their  entire  railroad  go  to  pay  for  the  rental  of  rolling  stock. 

8  Farmers'  Loan  &  Trust  Company  v.  Northern  Pacific  R.  Co.,  58  Fed.,  257; 
1893. 


FORECLOSURE   OF   RAILROAD   MORTGAGES        103 

and  with  the  language  of  the  Supreme  Court  in  the  Wabash 
case.1 

Of  course  if  the  receiver  adopts  the  lease  he  must  pay  rent  as 
fixed  by  the  lease. 

Sometimes  the  fall  of  the  lessee  brings  down  the  lessor.  It 
needs  a  receiver  as  much  as  the  lessee.  As  the  court  has  pos- 
session of  its  property,  a  general  creditor,  whether  a  citizen  of 
the  same  state  as  the  lessor  or  not,  may  file  his  bill  in  the  courts 
where  the  suits  against  the  lessee  are  pending  and  obtain  an 
order  appointing  receivers  of  the  property  of  the  lessor.  A 
simpler  method  was  used  in  the  New  York  street  railway  litiga- 
tion. The  lessor,  the  Metropolitan  Street  Railway  Company, 
filed  a  petition  in  the  creditor's  suit  pending  in  the  United 
States  Circuit  Court  against  its  lessee,  the  New  York  City 
Railway  Company,  in  which  it  asked  to  be  made  a  party  to 
that  suit  and  to  have  the  receivership  extended  so  as  to  em- 
brace all  its  interest  in  the  property  of  which  the  receivers  of  the 
City  Company  had  taken  possession.  It  alleged  that  its  affairs 
were  inextricably  tied  up  with  those  of  the  City  Company,  as 
all  of  its  property  was  leased  to  that  company;  it  had  pay- 
ments falling  due  on  mortgages  and  leases ;  and  it  was  dependent 
on  the  City  Company  for  money  with  which  to  make  the  pay- 
ments. The  court  made  the  order  prayed  for.  Its  action  was 
attacked  in  the  state  courts  and  in  the  United  States  Supreme 
Court.  A  justice  of  the  state  court  held  it  absolutely  void,  and 
appointed  state  court  receivers.2  The  Supreme  Court  of  the 
United  States  sustained  the  order  of  the  circuit  court.3 

I  now  come  to  the  foreclosure  suit. 

The  federal  courts  having  the  property  of  the  railroad  com- 
pany in  their  possession  through  their  officers,  it  is  withdrawn 

1  Quincy  M.  &  P.  Co.  v.  Humphreys,  145  U.  S.,  82,  101 ;  1892. 
*  People  v.  Hasbrouck  (Metropolitan  St.  Railway  Company),  57  Misc.,  130, 
133-6;  1907. 

3  Re  Metropolitan  Street  Railway  Receivership,  208  U.  S.,  90;  1908. 


104       FORECLOSURE    OF   RAILROAD   MORTGAGES 

from  the  jurisdiction  of  all  other  courts  and  they  have  as  ancil- 
lary to  the  suits  in  which  the  possession  was  acquired  jurisdic- 
tion to  hear  and  determine  all  questions  respecting  the  title, 
the  possession  or  the  control  of  the  property,  although  in  the 
ancillary  proceedings  there  is  no  diversity  of  citizenship.1 

Under  this  principle  the  trustee  of  any  mortgage  of  the  rail- 
road company  by  the  terms  of  which  the  right  to  begin  a  fore- 
closure suit  has  arisen,  has  his  remedy  in  the  courts  where  the 
creditors*  suits  are  pending  and  the  mortgaged  property  is 
situated. 

Ordinarily  the  question  of  whether  that  right  has  arisen  is 
beyond  controversy.  Upon  default  in  payment  there  is  a  right 
to  foreclose  for  the  amount  due,  whether  principal  or  interest.2 
Restrictive  provisions  are  strictly  construed  and  will  not  be 
held  to  restrict  the  right  to  foreclose  if  there  is  any  other  right 
such  as  a  right  to  enter  3  or  a  right  to  sell  under  a  power  of  sale  4 
to  which  they  may  have  been  intended  to  apply.  "  A  mortgage 
is  a  security  for  a  debt  and  failure  to  pay  the  debt  in  whole  or 
in  part  when  it  is  due  is  necessarily  a  breach."  A  breach  gives 
a  right  to  enforce  the  mortgage  and  nothing  but  perfectly  clear 
language  can  limit  this  right.  The  case  from  which  I  have  just 
quoted,  Mercantile  Trust  Company  v.  Chicago  P.  &  St.  L.  Rail- 
road Company,  61  Fed.  372, 1893,  has  always  been  an  authority 
upon  which  counsel  have  relied  when  defending  the  right,  im- 
mediately upon  default  in  payment  of  interest,  to  foreclose  mort- 
gages which  contain  language  seemingly,  on  a  first  reading  at 

1  Wabash  Railroad  v.  Adelbert  College,  208  U.  S.,  38,  at  p.  54 ;  1908.     As  to 
whether  actual  possession  as  distinguished  from  priority  in  beginning  suit  or  in 
moving  for  the  appointment  of  a  receiver  is  essential  to  exclusive  jurisdic- 
tion, see  Adams  v.  Mercantile  Trust  Co.,  66  Fed.  617 ;  1895 ;  C.  C.  A.  5th  Circuit. 
Knott  v.  Evening  Post  Co.,  124  Fed.  342  ;  1903.    Appleton  Water  Works  Co.  v.  Cen- 
tral Trust  Co.,  93  Fed.,  286 ;  1899 ;  C.  C.  A.  7th  Circuit.    Farmers  Loan  &  Trust 
Co.  v.  Lake  Street  Elevated  R.  R.  Co.,  177  U.  S.  51 ;  1900.    Compton  v.  Jesup,  68 
Fed.  263,  283 ;  1895. 

2  Howett  v.  Western  R.  R.  Co.,  94  U.  S.,  463 ;  1877.    Chicago  &  Vincennes 
Railroad  Co.  v.  Fosdick,  106  U.  S.,  47,  68;  1883. 

3  State  Trust  Co.  v.  Kansas  City  Railroad  Co.,  120  Fed.,  398;  1903. 

*  Morgan's  Company  v.  Texas  Central  Railway  Co.,  137  U.  S.,  171 ;  1890. 


FORECLOSURE   OF   RAILROAD   MORTGAGES        105 

any  rate,  intended  to  postpone  such  right  until  the  default  has 
continued  for  six  months  or  some  other  fixed  period  of  time.  As 
in  Central  Trmt  Company  v.  Worcester  Cycle  Mfg.  Co.,  93  Fed., 
712, 1899,  it  was  held  that  a  provision  in  a  mortgage  postponing 
the  right  to  foreclose  for  default  in  payment  of  interest  for  six 
months  is  solely  for  the  benefit  of  the  mortgagor  and  if  waived 
by  it  cannot  be  set  up  by  anyone  else ;  it  may  be  of  no  impor- 
tance in  a  "friendly"  foreclosure  suit  whether  the  language  of 
a  mortgage  amounts  to  such  a  provision  or  not ;  but  where  the 
relations  of  the  trustee  of  the  mortgage  and  the  railroad  com- 
pany are  hostile  it  may  be  of  great  importance.  I  shall  there- 
fore give  a  brief  statement  of  what  is  held  in  the  leading  cases 
which  discuss  the  question. 

In  Morgan's  Company  v.  Texas  Central  Railway  Company, 
137  U.  S.,  171,  1890,  the  mortgage  provided  that  in  case  the  rail- 
way company  should  default  in  the  payment  of  any  of  the  princi- 
pal or  interest  of  the  bonds  and  the  default  should  continue  sixty 
days  after  demand,  the  principal  should  immediately  become 
due,  and  upon  the  request  of  the  holders  of  seventy-five  per 
cent  of  the  bonds  the  trustee  might  and  should  take  possession 
of  the  railway ;  and  upon  request  of  the  holders  of  seventy-five 
per  cent  of  the  bonds  it  should  be  the  duty  of  the  trustee  "to 
foreclose  this  mortgage  .  .  .  and  sell  the  property  ...  at  pub- 
lic auction."  The  court  held  that  this  language  applied  solely 
to  foreclosure  and  sale  at  public  auction  without  the  aid  of  the 
court  and  did  not  limit  the  power  of  the  trustee  to  proceed  in  a 
suit  to  foreclose,  especially  in  view  of  the  fact  that  the  mortgage 
contained  a  further  clause  that  "  nothing  herein  contained  shall 
be  held  ...  to  prevent  .  .  .  the  foreclosure  of  this  instrument, 
the  appointment  of  a  receiver,  or  any  other  act  or  proceeding 
appropriate  in  such  cases,  by  any  court  of  competent  jurisdic- 
tion." In  Chicago  &  Vincennes  Railroad  Company  v.  Fosdick, 
106  U.  S.,  47,  1883,  the  mortgage  provided,  page  50,  that  if  de- 
fault should  be  made  in  the  payment  of  interest  on  any  of  the 
bonds  and  the  default  should  continue  six  months  after  demand, 


106       FORECLOSURE   OF   RAILROAD   MORTGAGES 

and  the  principal  of  all  the  bonds  should  become  immediately 
due,  the  trustee  might  so  declare  the  same  and  notify  the  com- 
pany thereof ;  and  upon  the  written  request  of  the  holders  of  a 
majority  of  the  bonds  should  proceed  to  collect  principal  and 
interest  of  all  bonds  outstanding  by  foreclosure  and  sale  or 
otherwise.  The  court  held,  page  68,  that  inasmuch  as  by  its 
terms  the  conveyance  was  declared  to  be  for  the  purpose  of 
securing  the  payment  of  interest  as  well  as  principal,  and  "by 
the  fourth  article,  the  mortgagor's  right  of  possession  terminates 
upon  a  default  in  the  payment  of  interest  as  well  as  principal/' 
the  trustees  on  non-payment  of  interest  might  file  a  bill  of  fore- 
closure. "  This  right  .  .  .  follows  from  the  nature  of  the  secur- 
ity and  arises  upon  its  face  unless  restrained  by  its  terms." 
The  court  did  not  consider  that  there  was  anything  in  the  mort- 
gage which  operated  as  such  restraint.  But  although  the  court 
said  that  suit  to  foreclose  for  non-payment  of  interest  would  lie 
upon  default,  it  held  it  would  not  lie  to  foreclose  for  accelerated 
principal  except  upon  the  written  request  of  the  holders  of  a 
majority  of  the  bonds,  pages  77-8.  In  Mercantile  Trust  Co.  v. 
Chicago,  P.  &  St.  L.  R.  Co.,  61  Fed.,  372,  1893,  the  mortgage  pro- 
vided that  if  default  should  be  made  in  the  payment  of  interest 
and  should  continue  for  six  months  it  should  be  the  duty  of  the 
trustee  to  proceed  at  law  or  in  equity  to  enforce  the  rights  of 
the  holders  of  the  bonds  upon  a  requisition  of  the  holders  of  at 
least  one-third  in  amount  of  the  bonds.  The  court  held  that 
this  clause  did  not  deprive  the  trustee  of  the  right  to  proceed 
immediately  upon  non-payment  of  interest  without  more  wait- 
ing. The  court  laid  stress  upon  the  fact  that  the  mortgage 
fixed  the  right  of  the  mortgagor  to  continue  in  possession 
until  default  in  breach  of  a  condition  and  not  until  default  and 
six  months  thereafter. 

In  Central  Trust  Company  v.  Worcester  Cycle  Mfg.  Co.,  93 
Fed.,  712,  1899,  article  2  of  the  mortgage  provided  that  the  mort- 
gagor might  remain  in  possession  until  six  months  after  default ; 
article  4  that  in  case  default  in  payment  of  interest  should  con- 


FORECLOSURE    OF   RAILROAD   MORTGAGES        107 

tinue  for  six  months  the  trustee  might  enter ;  article  5  that  in 
the  same  case  the  trustee  might  sell  and  dispose  of  the  property ; 
and  article  6  that  the  provision  in  article  5  was  cumulative  to 
the  ordinary  remedy  of  foreclosure  in  the  courts  and  that  the 
trustee  at  the  written  request  of  the  holders  of  a  majority  in 
value  of  the  bonds  "should,  whenever  entitled  to  do  so  by  the 
terms  thereof,  institute  proceedings  to  foreclose  this  mortgage." 
The  court  considered  that  these  articles  were  intended  to  post- 
pone a  suit  to  foreclose  even  for  interest  until  the  expiration  of 
the  six  months,  particularly  in  view  of  a  proviso  to  article  6 
that  "  neither  the  trustee  nor  the  .  .  .  holders  of  the  bonds  .  .  . 
or  any  of  them,  shall  sell  the  premises  hereby  mortgaged  .  .  . 
or  institute  any  .  .  .  proceeding  in  law  or  equity  for  the  fore- 
closure hereof  .  .  .  otherwise  than  in  the  manner  herein  pro- 
vided." 

In  general,  it  may  be  said  that  the  language  of  railroad 
mortgages  in  recent  years  is  usually  sufficient  to  prevent  fore- 
closure even  for  interest  until  the  expiration  of  the  period  of 
grace,  while  that  of  older  mortgages  is  not. 

A  provision  that  the  mortgaged  premises  shall  not  be  sold 
under  proceedings  at  law  or  equity,  "  it  being  the  intention  .  .  . 
of  the  parties  that  the  mode  of  sale  by  the  trustee  prescribed 
in  the  mortgage  shall  be  exclusive,"  is  void  on  the  ground  that 
it  is  an  attempt  to  oust  the  jurisdiction  of  the  court.1 

Before  beginning  a  suit  to  foreclose,  the  trustee  of  the  mort- 
gage should  see  that  every  preliminary  condition  is  complied 
with  and  should  try  to  have  evidence  of  such  compliance  which 
will  be  satisfactory  even  if  the  occasion  for  its  use  may  not 
arise  for  years.  So  far  as  possible,  written  admissions  of  de- 
mands, notices  and  requests  should  be  obtained,  and  where  any- 
thing is  done  written  admission  of  which  cannot  be  obtained, 
the  doing  of  it  should  be  witnessed  by  several  people  to  cover 
contingencies  of  death,  disappearance  and  so  on.  The  trustee 

1  Guaranty  Trust  Co.  v.  Greene  Cove  Co.,  139  U.  S.,  137,  142 ;  1891. 


108       FORECLOSURE   OF   RAILROAD   MORTGAGES 

should  not  confine  itself  to  doing  only  such  things  as  it  thinks 
are  necessary  to  establish  its  right  to  foreclose.  It  should  do 
whatever  anyone  whose  interest  it  might  be  to  delay  the  fore- 
closure could  possibly  think  of  saying  ought  to  have  been  done, 
provided,  of  course,  it  can  be  done  without  prejudice  to  the 
rights  of  the  trustee.  On  the  day  the  interest  is  due  and 
on  the  expiration  of  the  days  of  grace,1  if  any,  several  bond- 
holders should  demand  payment,  presenting  the  coupons  at 
the  place  where  the  interest,  by  the  terms  of  the  bond,  is  pay- 
able, and,  as  an  additional  precaution,  at  the  place  where  the 
last  coupon  was  paid,  at  the  office  of  the  company,  and  at  the 
office  of  the  receiver,  if  there  is  one.  The  bondholders  should 
make  affidavits  to  the  fact  of  the  presentation,  demand  and 
non-payment  and  should  deliver  the  affidavits  with  the  coupons 
attached  to  the  trustee  to  hold. 

Where  the  mortgage  provides  that  if  a  default  in  payment 
of  interest  continues  for  six  months  the  trustee  shall  upon  the 
demand  of  the  holders  of  a  majority  in  amount  of  the  bonds 
declare  the  principal  due  and  begin  suit  to  foreclose,  a  demand 
in  the  language  of  the  mortgage  should  be  signed  by  the  neces- 
sary bondholders;  they  should  place  opposite  their  signatures 
the  amount  and  numbers  of  the  bonds  held  by  them  and  should 
exhibit  the  bonds  to  the  trustee  if  so  required.  Such  demands 
are  usually  made  by  a  committee  of  bondholders  who  have  in 
their  own  possession  or  that  of  a  depositary  acting  for  them 
more  than  a  majority  in  amount  of  the  bonds.  The  committee 
passes  a  resolution  authorizing  the  secretary  to  make  the  de- 
mand on  its  behalf  and  the  secretary  delivers  to  the  trustee  a 
certified  copy  of  the  resolution  which  is  usually  signed  also  by 
the  members  of  the  committee.  The  secretary  also  certifies  to 

1  In  Alabama  &  G.  Mfg.  Co.  v.  Robinson,  56  Fed.,  690, 1893,  C.  C.  A.,  5th 
Circuit,  the  court  declined  to  pass  on  the  question  of  whether  the  coupons  were 
or  were  not  entitled  to  days  of  grace,  but  said  that  even  if  they  were,  where  the 
bonds  provided  that  the  principal  should  become  due  if  default  in  interest  should 
continue  for  six  months  after  maturity  and  demand  of  payment,  the  six  months 
was  not  in  addition  to  days  of  grace  but  ran  from  the  day  of  payment  named 
in  the  coupon. 


FORECLOSURE   OF   RAILROAD   MORTGAGES        109 

the  trustee  the  number  of  bonds  which  the  committee  has  in  its 
possession.  The  trustee  then  notifies  the  mortgagor  that  in 
accordance  with  the  request  of  the  majority  of  the  bondholders 
it  declares  the  principal  of  the  bonds  due. 

If  the  mortgage  provides  that  upon  default  in  payment  of 
interest  continuing  for  a  specified  time  the  principal  shall  be- 
come due,  the  trustee  at  the  expiration  of  the  time  may  fore- 
close for  principal  and  interest  without  a  formal  declaration  of 
the  maturity  of  the  principal.1  It  has  been  held  that  if  an 
option  to  declare  the  principal  due  is  to  be  exercised  it  should 
be  done  promptly.2 

Acceptance  of  the  interest  before  the  principal  becomes  due 
is  a  waiver  of  the  default ;  acceptance  of  the  interest  after  the 
principal  has  become  due  has  also  been  held  to  be  a  waiver.3 

Let  us  assume  that  the  trustee  of  the  mortgage  is  satisfied 
that  it  has  a  right  to  foreclose  and  goes  ahead.  What  does  it 
do? 

It  presents  a  petition,  entitled  in  the  creditor's  suit,  to  the 
court  of  primary  jurisdiction  praying  to  be  allowed  to  bring 
suit  to  foreclose  its  lien.  Usually  the  prayer  of  the  petition  is 
granted  as  a  matter  of  course.4  The  bill  which  has  been  pre- 
sented to  the  court  with  the  petition  is  immediately  filed. 

1  Morgan's  Co.  v.  Texas  Central  Railway  Co.,  137  U.  S.,  171 ;  1890. 

2  Wilson  v.  Winter,  6  Fed.,  16;  1881. 

3  Alabama  &  G.  Manufacturing  Co.  v.  Robinson,  56  Fed.  690;  1893;  C.  C. 
A.,  5th  Circuit. 

4  But  not  always.     In  the  pending  creditor's  suit  for  the  administration  of 
the  assets  of  the  Chicago,  Rock  Island  &  Pacific  Railway  Company,  a  petition 
by  the  holders  of  bonds  issued  under  the  Refunding  Mortgage  (the  trustee 
having  refused  to  act)  for  leave  to  file  a  bill  praying  among  other  things  for  a 
foreclosure  of  the  mortgage,  was  presented  to  the  court  on  March  21,  1916. 
The  following  day  the  court  set  it  down  for  hearing  on  April  24,  1916.     The 
hearing  took  place  before  Judge  Geiger  on  May  24,  1916.     Counsel  for  the  rail- 
road company  in  opposition  to  the  application  argued  that  the  court  had  the 
right  to  deny  the  application  where  the  bill  clearly  stated  no  case,  and  that 
even  if  the  bill  stated  a  case  or  it  was  doubtful  whether  it  did  or  not,  the  court 
was  not  bound  to  permit  an  independent  suit  to  be  brought  or  an  ancillary  or 
independent  bill  to  be  filed,  but  might  only  permit  an  intervention  pro  interesse 


110       FORECLOSURE   OP   RAILROAD   MORTGAGES 

It  was  usual  formerly  to  begin  the  bill  with  the  statement  that 
the  complainant  files  "this  its  dependent  bill."  Sometimes  the 
foreclosure  bill  and  other  papers  in  the  foreclosure  suit  were 
entitled  both  in  the  creditor's  suit  and  the  foreclosure  suit. 
Anything  of  the  sort  is  unnecessary.  The  suit  is  an  ordinary 
suit  to  foreclose  a  mortgage.  From  the  time  the  court  enters 
the  order  permitting  the  bill  to  be  filed  "the  court  proceeds  in 
it,"  as  Judge  Taft  said  in  the  passage  already  quoted,  supra, 
page  83 :  "  without  further  regard  to  the  pleading  or  course  of 
the  principal  action."  Any  proper  party  may  be  joined  as  a 
party  defendant  regardless  of  whether  he  is  a  party  to  the 
creditor's  bill  or  not. 

The  trustee  has  the  right  to  bring  the  suit  without  joining  any 
bondholders  as  parties  complainant  or  defendant.  The  same 
parties  should  be  made  defendants  as  in  any  foreclosure  suit, 
the  mortgagor,  its  grantees,  subsequent  mortgagees,  lienors  and 
so  on.  It  is  usual  to  join  the  receivers  in  the  creditor's  bill  as 
parties  defendant,  but  it  is  unnecessary  and  has  been  held  to 
be  improper.1 

The  foreclosure  bill  sets  out : 

(a)  diversity  of  citizenship  where  it  exists ; 

an  unnecessary  fact  stated  on  the  principle  of  pleading  all  the 
grounds  of  jurisdiction  there  are : 

(6)  the  making  of  the  mortgage,  the  execution  of  the  bonds  secured 
by  it,  the  certification  of  them  by  the  trustee,  the  issuing  of  them  in 

suo;  citing  Wiswell  v.  Sampson,  14  How.  (U.  S.),  52,  65,  67,  1853.  Compton  v. 
Jesup,  68  Fed.,  263,  279 ;  1895. 

Counsel  for  the  petitioners  contended  that  the  bill  stated  a  cause  of  action,  and 
that  consequently  the  petitioners  had  an  absolute  right  to  file  the  bill ;  citing  Minot 
v.  Hasten,  95  Fed.,  734 ;  1899.  United  States  Trust  Co.  v.  Chicago  Terminal  Co., 
188  Fed.,  292;  1911.  Western  Union  Company  v.  United  States  &  Mex.  Trust 
Co.,  221  Fed.,  545 ;  1915.  Odell  v.  Batterman  Co.,  223  Fed.,  292  ;  1915.  Neither 
counsel  cited  any  case  where  it  had  been  held  that  the  court  was  bound  to  allow 
a  mortgagee  to  proceed  by  bill  rather  than  by  intervention  pro  interesse  suo; 
nor  on  the  other  hand  any  unreversed  case  where  the  court  had  refused  to  allow 
the  mortgagee  to  proceed  either  by  bill  or  intervention. 

Judge  Geiger  granted  the  prayer  of  the  petition  August  |14,  1916. 

1  Continental  Trust  Co.  v.  Toledo,  St.  L.  &  K.  C.  R.  Co.,  82  Fed.,  642 ;  1897. 


FORECLOSURE   OF   RAILROAD   MORTGAGES        111 

accordance  with  the  terms  of  the  mortgage,  and  the  ownership  of  them 
by  purchasers  for  value ; 

(c)  a  description  of  the  property  mortgaged ; 

(d)  a  statement  of  any  liens  the  holders  of  which  are  made  parties 
defendant  and  if  any  of  the  liens  are  prior  to  the  mortgage  the  reasons 
that  justify  the  complainant  in  making  parties  the  holders  of  such  liens ; 

(e)  a  statement  of  the  default ; 

(/)  provisions  of  the  mortgage  that  upon  default  the  income  is 
assigned  to  the  mortgagee  or  the  trustee  is  entitled  to  the  appointment 
of  a  receiver  to  operate  the  railroad  and  receive  the  income ;  the  in- 
solvency of  the  defendant  and  the  inadequacy  of  the  mortgaged  prop- 
erty as  security ; 

(g)  the  possession  of  the  mortgaged  property  by  the  court  under  the 
creditor's  bill ; 

(h)  the  fact  that  the  matter  in  controversy  exceeds  exclusive  of  in- 
terest and  costs,  the  sum  or  value  of  three  thousand  dollars : 

a  fact  alleged  on  the  same  principle  as  (a).1 

If  the  principal  has  become  due  by  acceleration  or  otherwise 
the  bill  so  states,  and  prays  that  the  mortgage  be  foreclosed 
unless  the  whole  amount  due  for  principal  and  interest  is 
paid. 

If  the  default  is  non-payment  of  interest  only,  the  prayer  is 
that  the  mortgage  be  foreclosed  unless  the  interest  is  paid.  It 
would  seem,  however,  in  view  of  what  has  been  said  in  the  Su- 
preme Court  and  acted  upon  in  lower  courts,  that  it  might  be  well 
for  the  bill  to  pray  also  that,  in  case  the  overdue  interest  should 
be  paid,  the  court  should  retain  jurisdiction  in  order  to  sell  the 
property  in  case  of  another  default  in  payment  of  interest  or 
principal.2  If  the  principal  becomes  due  before  judgment  a 
supplemental  bill  is  filed  setting  up  the  fact  and  enlarging  the 
prayer. 

The  bill  in  addition  to  praying  for  a  foreclosure  and  sale 

1  Of  course  where  the  mortgaged  property  is  not  in  the  prossession  of  the 
Court  allegation  (g)  is  omitted  and  allegations  (a)  and  Qi)  are  essential. 

2  Howell  v.  Western  Railroad  Co.,  94  U.  S.,  463, 466 ;  1877.   Chicago  &  Vincennes 
R.  R.  Co.  v.  Fosdick,  106  U.  S.,  47  at  68  and  69 ;  1883.   In  Toler  v.  East  Tennessee, 
V.  &  G.  Ry.  Co.,  67  Fed.,  168,  1894,  at  181,  the  court  said  :  "The  debtor  can  pre- 
vent a  sale  by  paying  into  the  master's  office  the  amount  necessary  to  pay  the 
interest  in  default.     All  proceedings  will  then  be  stayed  until  another  default." 


112       FORECLOSURE   OF   RAILROAD   MORTGAGES 

asks  that  a  receiver  pending  the  suit  be  appointed,  and  that  the 
trustee  have  judgment  against  the  company  for  the  amount  of 
the  bonds,  or,  if  there  is  no  provision  in  the  mortgage  authoriz- 
ing such  a  judgment,  that  the  bondholders  have  judgment  for 
any  deficiencies. 

The  railroad  company  seldom  files  an  answer  at  once.  It 
usually  appears  and  consents  to  an  order  that  the  receiver- 
ship under  the  creditor's  bill  be  extended  to  the  foreclosure 
suit  and  that  the  receivers  under  the  creditor's  bill  be 
appointed  receivers  under  the  foreclosure  bill ;  but  without  the 
appearance  or  consent  of  the  railroad  company  the  court  will 
make  the  order  where  the  property  is  in  the  hands  of  receivers 
and  there  is  a  default  under  the  mortgage.  The  order  contains 
generally  the  same  provisions  as  the  order  appointing  receivers 
under  the  creditor's  bill,  such  as  provisions  authorizing  them 
to  operate  the  property,  to  pay  preferred  claims  and  to  bring 
and  defend  suits.  It  sometimes  contains  provisions  that  all 
liabilities  of  the  receivers  incurred  while  operating  under  the 
creditor's  bill  shall  be  liabilities  of  the  receivers  under  the 
foreclosure  bill.  In  the  New  York  City  Railway  receivership  it 
was  announced  more  than  once  by  Judge  Lacombe  that  the 
court  would  hold  all  the  property  over  which  it  had  appointed 
receivers  liable  to  the  last  penny  for  the  indebtedness  of  the  re- 
ceivers whether  incurred  in  operating  the  properties  as  receivers 
under  the  creditor's  bill  or  under  the  foreclosure  bills  and 
whether  incurred  as  receivers  of  the  lessee  New  York  City  Rail- 
way Company  or  the  lessor  Metropolitan  Street  Railway  Com- 
pany; as  between  the  lessee  and  the  lessor,  the  deficit  which 
arose  from  expenditures  for  permanent  improvements  upon  the 
property  of  the  lessor  made  before  it  had  been  taken  over  by 
separate  receivers,  was  charged  on  the  settlement  of  accounts 
to  the  lessor ;  and  the  court  intimated  —  although  it  considered 
that  on  the  facts  before  it  it  did  not  have  to  decide  the  question 
—  that  the  lien  of  the  mortgagees  of  the  lessor  would  be  dis- 
placed, if  necessary,  in  favor  of  the  claim  of  the  receivers  of  the 


FORECLOSURE   OF   RAILROAD   MORTGAGES        113 

lessee  to  be  repaid  such  expenditures.1  There  are  cases  which 
say  that  indebtedness  for  permanent  improvements  made  upon 
the  mortgaged  property  during  a  receivership  under  a  judg- 
ment creditor's  bill  ought  not  to  be  paid  out  of  the  mortgaged 
property  or  even  out  of  the  income  earned  after  the  receiver- 
ship has  been  extended  to  the  foreclosure  suit. 

"The  reconstruction,  enlargement,  or  permanent  improvement  of 
mortgaged  property  by  a  court's  receiver,  under  such  circumstances 
does  not  any  more  displace  or  postpone  the  prior  mortgage  lien  than 
would  the  like  act  of  the  mortgagor  in  the  absence  of  a  receivership."2 

The  court  relied  upon  Kneeland  v.  American  Loan  Company, 
136  U.  S.,  89,  1890,  where  a  claim  for  so-called  rental  of  rolling 
stock  under  a  car  trust  agreement  against  a  receiver  appointed 
at  the  instance  of  a  judgment  creditor  of  a  railroad  company  was 
sought  to  be  enforced  against  the  receiver  in  the  foreclosure  suit 
as  a  lien  upon  the  property  in  priority  to  the  mortgage.  The 
court  held  that  the  claim  could  not  be  given  such  a  preference 
and  that  too,  although  the  mortgagees  were  parties  defendant 
to  the  creditor's  bill.  But  the  court  clearly  did  not  consider 
the  claim  a  debt  of  the  receivership  at  all  (see  page  99).  It  said 
that  there  were  two  lien  holders  one  with  a  lien  on  the  railroad 
and  the  other  with  a  lien  on  the  cars  and  neither  could  claim 
to  be  paid  out  of  the  properties  of  the  other.  On  the  general 
question  of  the  liability  of  the  receiver  in  a  foreclosure  suit  for 
the  indebtedness  of  the  receiver  under  the  creditor's  bill,  the 
court  laid  down  this  principle : 

"A  court  which  appoints  a  receiver  acquires,  by  virtue  of  that 
appointment,  certain  rights  and  assumes  certain  obligations,  and  the 
expenses  which  the  court  creates  in  discharge  of  those  obligations  are 
burdens  necessarily  on  the  property  taken  possession  of,  and  this  irre- 
spective of  the  question  who  may  be  the  ultimate  owner,  or  who  may 
have  the  preferred  lien,  or  who  may  invoke  the  receivership.  So  if,  at 

1  Pennsylvania  Steel  Co.  v.  New  York  City  Ry.  Co.,  198  Fed.,  721,  734 ;  1912 ; 
C.  C.  A.,  2d  Circuit. 

2  Atlantic  Trust  Co.  v.  Dana,  128  Fed.,   209,  230 ;   1903 ;    C.   C.  A.,  8th 
Circuit. 


114       FORECLOSURE   OF   RAILROAD   MORTGAGES 

the  instance  of  any  party  rightfully  entitled  thereto,  a  court  should  ap- 
point a  receiver  of  property,  the  same  being  railroad  property,  and 
therefore  under  an  obligation  to  the  public  of  continued  operation,  it, 
in  the  administration  of  such  receivership,  might  rightfully  contract 
debts  necessary  for  the  operation  of  the  road,  either  for  labor,  supplies 
or  rentals,  and  make  such  expenses  a  prior  lien  on  the  property  itself." 

To  say  that  the  court  meant  that  only  debts  contracted  by  it 
for  operation  as  distinguished  from  debts  for  construction  are 
to  be  paid  out  of  the  property,  is  to  disregard  what  the  court 
lays  stress  on,  "the  obligation  to  the  public  of  continued  opera- 
tion," and  the  fact  that  to  the  performance  of  this  obligation 
new  construction  is  often  as  essential  as  supplies.  Suppose 
after  a  receiver  is  appointed  under  a  creditor's  bill,  the  court 
finds  it  is  dangerous  to  operate  trains  unless  a  portion  of  the 
railroad  is  entirely  reconstructed.  In  endeavoring  to  fulfill 
"the  obligation  to  the  public  of  continued  operation"  the  court 
orders  the  receiver  to  make  a  contract  for  such  reconstruction. 
It  knows  that  no  contractor  would  undertake  any  such  work 
with  the  understanding  that  the  only  fund  to  pay  him  would 
be  the  earnings  of  the  receivership  under  the  creditor's  bill,  and 
that  such  receivership  might  be  superseded  at  any  moment. 
Surely  nothing  can  be  more  unfortunate  than  to  allow  the  con- 
tractor to  perform  his  contract  with  the  court  and  then  when 
he  has  performed  it,  to  say  to  him  that  the  court  refuses  to 
pay  him,  although  it  has  property  in  its  hands  worth  millions 
of  dollars,  because  other  parties  have  come  into  the  litigation 
since  the  work  was  undertaken. 

What  effect  upon  the  rights  of  the  bondholders  and  the 
general  creditors  follows  from  the  extension  of  the  receivership 
to  the  foreclosure  suit  ?  * 

1  When  a  suit  to  foreclose  is  begun,  pending  a  creditor's  suit,  the  order 
directs  sometimes  that  the  receivership  be  extended  to  the  foreclosure  suit ; 
sometimes  that  the  receivers  already  appointed  be  appointed  receivers  of  the 
property  covered  by  the  mortgage ;  very  often  the  order  contains  both  direc- 
tions. By  "extension  of  the  receivership,"  I  mean  the  making  of  any  of  these 
orders. 


FORECLOSURE   OF   RAILROAD   MORTGAGES        115 

To  whom  do  the  net  earnings  of  the  receivership  belong  so 
long  as  the  receivership  is  simply  under  the  creditor's  bill? 
The  question  is  seldom  one  of  practical  importance,  because 
such  a  receivership  is  usually  so  brief  that  the  net  earnings  all 
go  to  the  payment  of  preferred  debts,  laborers'  wages,,  traffic 
balances  and  so  on.  I  think  lawyers  generally  have  been  under 
the  impression  that  any  net  earnings  not  so  used  were  distrib- 
utable pro  rata  to  all  creditors  secured  or  unsecured,  particularly 
where  the  mortgage  did  not  purport  to  assign  the  income  to  the 
mortgagee ;  the  reason  for  this  impression  being  the  statement 
so  often  made,  for  instance  in  United  States  Trust  Company  v. 
Wabash,  150  U.  S.,  287,  1893,  at  page  308,  that  "until  the  mort- 
gagee asserts  his  rights  under  the  mortgage  to  the  possession 
of  the  road  by  filing  a  bill  of  foreclosure,  or,  if  the  road  be 
in  the  hands  of  a  third  party,  by  demanding  possession  of  such 
party,  he  has  no  right  to  its  earnings  and  profits."  Judge 
Sanborn  so  held  in  Farmers'  Loan  &  Trust  Co.  v.  American 
Waterworks  Co.,  107  Fed.,  23, 1895,  saying  that  the  income  earned 
by  receivers  appointed  at  the  suits  of  stockholders  and  creditors 
prior  to  the  beginning  of  the  foreclosure  suit  was  free  from  any 
equitable  lien  of  the  mortgage  bondholders ;  that  it  required  a 
demand  of  surrender  of  the  income  and  profits  or  the  filing  of 
a  bill  of  foreclosure  to  charge  this  income  with  the  superior  lien 
of  the  mortgage  and  that  the  income  earned  by  receivers  prior 
to  the  foreclosure  bill  was  applicable  to  the  payment  of  the 
unsecured  as  well  as  the  secured  debts ;  but  Judge  Taft  held  in 
Thomas  v.  Cincinnati,  N.  0.  &  T.  P.  Ry.  Co.,  91  Fed.,  202,  1898, 
that  the  net  earnings  from  the  operation  of  the  railroad  property 
by  a  receiver  under  a  general  creditor's  bill  belonged  to  the  credi- 
tors in  the  same  order  of  priority  as  the  proceeds  of  the  sale  of 
the  property  itself,  and  the  court  of  appeals  for  the  third  circuit 
held  in  Haehnlen  v.  Drayton,  192  Fed.,  300,  1911,  that  the 
net  earnings  in  the  period  between  the  filing  of  a  bill,  which 
though  filed  by  a  judgment  creditor  the  court  considered  clearly 
a  general  creditor's  bill,  and  the  beginning  of  a  foreclosure  suit 


116       FORECLOSURE   OF   RAILROAD   MORTGAGES 

belonged  to  the  bondholders.  Where  the  creditor's  bill  is 
brought  by  a  judgment  creditor  for  his  own  benefit  the  net 
earnings  go  to  him  until  a  mortgagee  takes  steps  to  impound 
them.1  From  the  moment  the  receivership  is  extended  to  the 
foreclosure  suit,  the  net  earnings  belong  to  the  bondholders 
secured  by  the  mortgage  whether  the  mortgage  assigns  income 
or  not.2 

Even  though  the  mortgage  by  its  terms  covers  earnings,  they 
do  not  pass  to  the  mortgagee  until  he  makes  demand  for  the 
mortgaged  property  or  for  surrender  of  its  possession  under  the 
provisions  of  the  mortgage.3  The  usual  way  of  securing  the 
earnings  for  the  bondholders  is  by  the  appointment  of  a  receiver 
in  the  foreclosure  suit;  but  a  demand  for  possession  made  by 
the  commencement  of  a  suit  by  a  mortgagee  to  be  put  in  posses- 
sion,4 or  the  filing  by  the  mortgagee  of  an  intervening  petition 
in  a  pending  receivership  claiming  the  income,5  is  sufficient  to 
get  for  the  mortgagee  all  income  thereafter  earned. 

At  the  time  the  order  is  made  extending  the  receivership  of 
the  general  creditor's  bill  to  the  foreclosure  suit,  it  is  usual  to 
make  an  order  consolidating  the  two  suits.  Such  litigations 
used  to  go  on  after  the  order  of  consolidation  without  any  one 
connected  with  them  having  any  definite  idea  —  unless  perhaps 
an  erroneous  one  —  of  what  difference  it  made  whether  the  suits 
had  been  consolidated  or  not,  except  that  pleadings  and  orders 
were  entitled  in  both  suits,  until  the  question  was  discussed  in 
opinions  by  Judges  Taft  and  Lurton  in  the  receivership  of  the 
Toledo,  St.  Louis  and  Kansas  City  Railroad  Company.6  They 

1  Sage  v.  Memphis  &  Little  Rock  R.  R.  Co.,  125  U.  S.,  361 ;  1888. 

2  Central  Trust  Company  of  New  York  v.  Chattanooga  R.  &  C.  R.  Co.,  94 
Fed.,  275,  281,  1899,  and  Freedman's  Saving  Company  v.  Shepherd,  127  U.  S.,  494, 
502;  1888. 

*Galveston  Railroad  Company  v.  Cowdrey,  11  Wall.,  459;  1871. 
4  Dow  v.  Memphis  &  L.  R.  Co.,  124  U.  S.,  652 ;  1888. 
6  Atlantic  Trust  Co.  v.  Dana,  128  Fed.,  209,  219;  1903. 
•  Continental  Trust  Co.  v.  Toledo,  St.  L.  &  K.  C.  R.  Co.,  82  Fed.  642,  645-6-7 ; 
1897.    95  Fed.  497,  505-6;  1899;  C.  C.  A.,  6th  Circuit. 


FORECLOSURE   OF   RAILROAD   MORTGAGES        117 

said  that  each  suit  is  after  consolidation  an  independent  suit; 
consolidation  does  not  change  the  rules  of  equity  pleading 
nor  the  rights  of  the  parties ;  the  parties  in  one  suit  do  not  be- 
come parties  in  the  other  and  a  decree  in  one  suit  is  not  a  decree 
in  the  other  unless  so  directed ;  the  bringing  on  of  the  two  suits 
for  hearing  does  not  avoid  the  necessity  of  separate  decrees  in 
each  case ;  nor  does  the  fact  that  the  two  suits  have  been  con- 
solidated require  that  every  issue  under  each  suit  should  be 
heard  at  the  same  time.  A  statement  sometimes  made  that 
Judge  Taft  held,  where  a  creditor's  suit  and  a  foreclosure  suit 
are  consolidated,  any  creditor  may  defend  against  the  bill  to 
foreclose,  is  not  correct.  What  he  did  hold  was  that  every 
creditor  has  the  right  in  the  creditor's  suit  to  attack  the  claim 
of  every  other  creditor  who  files  a  claim  in  that  suit ;  and  con- 
sequently as  a  committee  had  presented  the  claim  of  the  bond- 
holders in  that  suit  the  bonds  could  be  attacked  like  any  other 
claim  —  a  holding  which  shows  the  advisability  of  bondholders 
keeping  out  of  the  creditor's  suit  unless  there  is  something  sub- 
stantial to  be  gained  by  getting  in. 

I  shall  now  consider  the  subjects  of  preferred  claims  and 
interventions. 

Certain  classes  of  indebtedness  incurred  by  the  railroad  com- 
pany before  the  receivership  are  entitled  to  payment  in  priority 
to  bonds  and  other  debts  out  of  the  income  of  the  receivership 
and  sometimes  out  of  the  body  of  the  property,  mortgaged  or 
unmortgaged,  of  the  railroad  company.  Indebtednesses  of  this 
sort  are  called  "preferred  claims"  and  are  described  in  the  cases 
as  "current  debts,"  "debts  for  current  expenses,"  "debts  of 
income,"  "debts  of  operation"  or  "supply  claims." 

Before  considering  the  extent  to  which  current  debts  are  en- 
titled to  priority,  whether  out  of  income  or  corpus,  I  shall  give 
the  definition  of  a  current  debt  in  the  words  of  the  Supreme 
Court :  a  "  debt  not  contracted  upon  the  personal  credit  of  the 


118       FORECLOSURE   OF   RAILROAD   MORTGAGES 

company  but  to  keep  the  railroad  itself  in  condition  to  be  used 
with  reasonable  safety  for  the  transportation  of  persons  and 
property,  and  with  the  expectation  of  the  parties  that  it  is  to 
be  met  out  of  the  current  receipts  of  the  company."  1 

In  order  to  bring  his  claim  within  this  definition  a  claimant 
need  not  prove  that  anything  was  said  by  him  or  the  railroad 
company  about  their  expectations  or  the  sort  of  credit  he  was 
contracting  upon.  The  question  of  whether  the  creditor  con- 
tracted upon  the  personal  credit  of  the  railroad  company,  or  on 
the  contrary  with  the  expectation  that  he  was  to  be  paid  out 
of  current  receipts,  is  to  be  determined  "in  each  case  by  the 
amount  of  the  debt,  the  time  and  terms  of  payment  and  all  other 
circumstances  attending  the  transaction."  Two  decisions  of 
the  Supreme  Court,  handed  down  on  the  same  day,  one,  South- 
ern Railway  v.  Carnegie  Steel  Company,  176  U.  S.,  257,  1900, 
holding  that  an  indebtedness  for  rails  sold  in  certain  circum- 
stances was  a  preferred  debt,  and  the  other,  Lackawanna  Iron  & 
Coal  Company  v.  Farmers'  Loan  &  Trust  Company,  176  U.  S., 
298,  1900,  holding  that  an  indebtedness  for  rails  sold  in  other 
circumstances  was  not,  are  helpful  to  an  understanding  of  what 
a  current  debt  is.  In  the  Carnegie  Company  case  the  court  said 
that  in  view  of  the  comparatively  small  amount  of  rails  there 
was  nothing  to  suggest  "that  they  were  to  be  used  in  con- 
structing new  and  additional  road  and  not  to  keep  existing  roads 
in  proper  condition  for  use.  Every  railroad  must  have  on  hand 
a  limited  quantity  of  rails  in  order  to  keep  every  part  of  its  line 
in  proper  and  safe  condition."  In  the  Lackawanna  Company 
case  the  court  said  that  "  the  work  required  to  be  done  in  order 
to  put  the  main  road  .  .  .  and  its  divisions  in  proper  condition 
was  not  such  as  would  be  done  in  the  ordinary  course  of  the 
business  and  operation  of  a  railroad,  but  was  so  extensive  as 
to  amount  to  reconstruction  or  the  construction  of  new  road," 
and  therefore,  although  the  "  rails  were  imperatively  required  in 
order  that  the  road  might  be  safely  used  for  transportation  of 

1  Southern  Railway  v.  Carnegie  Steel  Company,  176  U.  S.,  257,  285 ;  1900. 


FORECLOSURE   OF   RAILROAD   MORTGAGES       119 

persons  and  property,"  the  claimant  was  not  entitled  to  a  pref- 
erence even  out  of  the  income  of  the  receivership.  These  two 
cases  have  been  generally  treated  by  the  courts  as  authority, 
notwithstanding  qualifying  statements  in  both,  for  the  broad 
propositions,  that  where  supplies  or  work  are  for  repairs,  main- 
tenance, to  keep  the  road  up,  the  indebtedness  is  a  current 
debt;  where  they  are  for  construction,  whether  original  con- 
struction or  reconstruction,  the  indebtedness  is  not  a  current 
debt. 

The  Supreme  Court  has  often  said  that  the  priority  of  un- 
secured claims  "is  recognized  only  in  a  few  specific  cases"  and 
that  "  it  is  the  exception,  not  the  rule  that  the  priority  of  mort- 
gage liens  can  be  displaced";  but,  as  a  matter  of  fact,  in  the 
ordinary  receivership  of  a  railroad,  the  majority  of  the  unsecured 
claims  are  given  priority.  The  principal  claims  that  are  not  are 
indebtednesses  for  money  lent,  for  land,  equipment,  —  except 
perhaps  such  as  may  be  necessary  to  keep  the  road  a  going  con- 
cern,1 —  new  construction,  rent,  guaranties  on  bonds  or  stocks 
of  other  railroads  and  tort  claims.2 

In  Fosdick  v.  Schatt,  99  U.  S.,  235,  1878,  the  court  laid  down 
these  rules : 

(1)  When  a  railroad  mortgagee  asks  a  court  of  chancery  to  appoint 
a  receiver  of  railroad  property  pending  foreclosure  proceedings  the 
mortgagee  is  asking  for  a  favor  and  not  a  right ;  and  therefore  the  court 
may  provide,  as  a  condition  upon  which  the  appointment  is  made,  that 
outstanding  debts  for  labor,  supplies,  equipment  or  permanent  improve- 
ments of  the  mortgaged  property  shall  be  paid  out  of  the  income 
earned  during  the  receivership  (p.  253). 

(2)  If  no  such  provision  is  made  when  the  receiver  is  appointed,  and 
it  appears  in  the  progress  of  the  case  that  earnings  which  ought  to  have 
been  employed  to  pay  debts  for  labor,  supplies  and  the  like  had  been 
used  to  pay  bonded  interest  or  to  provide  additional  equipment  or 

1  Rhode  Island  Locomotive  Works  v.  Continental   Trust  Co,,  108  Fed.,  5,  7 ; 
1900 ;  C.  C.  A.,  6th  Circuit. 

2  Penn.  Steel  Co.  v.  N.  Y.  City  Ry.  Co.,  216  Fed.,  458,  472  ;  1914 ;  C.  C.  A., 
2d  Circuit.    St.  Louis  Trust  Co.  v.  Riley,  70  Fed.  32  ;  1895 ;  C.  C.  A.,  8th  Circuit. 


120       FORECLOSURE    OF   RAILROAD   MORTGAGES 

permanent  improvements,  the  court  has  power  to  use  the  income  of  the 
receivership  to  pay  debts  which  but  for  the  diversion  of  the  income 
would  have  been  paid  in  the  ordinary  course  of  business  (p.  253). 

(3)  If  income  of  the  receivership  which  would  otherwise  be  applied 
to  the  payment  of  debts  for  current  expenses,  i.e.  under  the  provisions 
of  rules  (1)  and  (2),  is  used  during  the  receivership  to  make  permanent 
improvements,  to  the  extent  to  which  this  is  done  the  proceeds  of  the 
sale  of  the  mortgaged  property  may  be  used  to  pay  off  such  debts. 
"  The  same  may  sometimes  be  true  in  respect  to  expenditures  before 
the  receivership"  (p.  254). 

The  theory  upon  which  the  court  based  these  rules  was  that 
daily  and  monthly  earnings  ordinarily  should  go  to  pay  daily 
and  monthly  expenses ;  and  when  these  earnings  are  used  to  pay 
bonded  interest  or  make  permanent  improvements  for  the  better- 
ment of  the  mortgaged  property,  they  are  diverted  from  those 
to  whom  in  equity  they  belong  to  the  benefit  of  the  mortgage 
creditors. 

It  will  be  noted  that  these  rules  did  not  authorize  the  court 
to  apply  the  earnings  of  the  receivership  to  current  debts  unless 

(a)  the  order  was  made  as  a  condition  to  the  appointment  of  a 
receiver,  or 

(6)  there  was  a  diversion  before  the  receivership  of  current  earnings 
from  the  payment  of  current  debts  to  the  benefit  of  the  bondholders. 

These  limitations  were  removed  in  Burnham  v.  Bowen,  111 
U.  S.,  776,  1884.  In  that  case,  a  foreclosure  suit,  no  provision 
was  made  in  the  order  appointing  the  receiver  for  the  payment 
of  current  debts ;  and  there  was  no  proof  of  any  diversion  by  the 
company  of  current  earnings.  The  court  nevertheless  held  that 
current  debts  were  a  charge  on  the  income  earned  during 
the  receivership,  saying  that  when,  in  enforcing  the  rights  of 
mortgage  creditors,  a  court  of  chancery  took  possession  of  a 
mortgaged  railroad,  it  ought  to  do  what  the  company  would 
have  been  bound  to  do  if  it  had  remained  in  possession, 
namely,  pay  out  of  what  the  court  receives  from  earnings  all 
the  debts  which  in  equity  and  good  conscience  are  chargeable 


FORECLOSURE   OF   RAILROAD   MORTGAGES        121 

upon  such  earnings;  "debts  of  the  income  should  be  paid 
from  the  income  before  it  is  applied  in  any  way  to  the  use 
of  the  mortgagees." 

Rule  2  of  Fosdick  v.  Schall  as  modified  by  the  holding  in 
Burnham  v.  Bowen  therefore  may  be  stated  thus :  the  court  has 
power  at  any  time  to  use  the  income  of  the  receivership  to  pay 
current  debts  of  the  railroad  company. 

Upon  the  theory  which  underlies  Rule  1  in  Fosdick  v.  Schall, 
some  judges  considered  it  proper  to  make  it  a  condition  of  the 
order  appointing  a  receiver  of  a  railroad  that  substantially  all 
unsecured  debts  should  be  paid  preferentially  out  of  the  income 
of  the  receivership  or  even  out  of  the  mortgaged  property. 
This  practice  .was  condemned  in  Kneeland  v.  American  Loan 
Company,  136  U.  S.,  89,  1890,  the  court  saying  (see  page  97), 
"when  a  court  appoints  a  receiver  of  railroad  property  it 
has  no  right  to  make  that  receivership  conditional  on  the 
payment  of  other  than  those  few  unsecured  claims  which, 
by  the  rulings  of  this  court,  have  been  declared  to  have  an 
equitable  priority." 

The  effect  of  this  decision  was  to  take  from  the  court  the 
right  to  give  any  preference  in  an  order  appointing  a  receiver 
which  it  had  not  the  right  to  give  at  any  time  during  the 
receivership. 

Rule  3  of  Fosdick  v.  Schall  has  been  carried  to  its  fullest 
extent.  The  diversion  which  entitles  the  holder  of  a  current 
debt  to  a  preference  out  of  the  corpus  may  be  diversion  of  the 
income  of  the  receivership  or  of  the  company  for  a  limited  period 
before  receivers  were  appointed; *  and  under  Southern  Railway  v. 
Carnegie  Steel  Company,  176  U.  S.,  257,  1900,  the  term  diver- 
sion covers  not  only  income  spent  for  permanent  improve- 
ments, but  for  the  payment  of  charges  upon  the  mortgaged 
property  and  for  other  purposes  beneficial  to  the  mortgagee. 

1  Virginia  &  Alabama  Coal  Co.  v.  Central  R.  &  B.  Co.,  170  U.  S.  365 ;  1898. 
International  Trust  Co.  v.  Townsend  Co.,  95  Fed.  850 ;  1899.  Rhode  Island  Loco- 
motive Works  v.  Continental  Trust  Co.,  108  Fed.  5 ;  1900. 


122       FORECLOSURE   OF   RAILROAD   MORTGAGES 

In  that  case  the  court  held  that  payment  of  interest  on  under- 
lying bonds  and  bonds  of  lessor  roads  was  a  diversion,  al- 
though in  St.  Louis,  etc.,  R.  R.  Co.  v.  Cleveland,  etc.,  R.  Co.,  125 
U.  S.,  658,  1888,  it  had  held  that  payment  of  interest  on  a 
prior  mortgage  was  not. 

Some  current  debts  are  entitled  to  a  preference  out  of  the 
corpus,  although  there  has  been  no  diversion  of  income. 

In  Gregg  v.  Metropolitan  Trust  Co.,  197  U.  S.,  183,  1905,  the 
Court  refused  such  a  preference  to  a  claim  for  cross  ties  essential 
to  the  replacement  of  ties  decayed  in  current  operation  of  the 
railroad,  saying  that  claims  for  supplies  essential  to  the  preserva- 
tion of  the  road  were  not  entitled  to  such  a  preference,  but  only 
claims  the  payment  of  which  was  "necessary  to  the  business 
of  the  road."  As  instances  of  these  the  court  referred  to  the 
claims  which  were  given  a  preference  out  of  the  corpus  in  Mil- 
tenberger  v.  Logansport  Ry.  Co.,  106  U.  S.,  286,  1882 :  debts  to 
connecting  lines  of  road  for  materials,  repairs,  and  unpaid 
ticket  and  freight  balances,  and  debts  to  operatives  for 
wages.  In  that  case,  the  court  said  that,  unless  wages  were 
paid,  the  operatives  might  stop  work  to  the  injury  both  of  the 
property  and  of  the  public ;  and  if  the  amounts  due  to  connect- 
ing railroads  were  not  paid,  they  might  refuse  to  continue  busi- 
ness relations  with  the  insolvent  railroad  company  and  its 
receiver. 

Three  judges  dissented  in  the  Gregg  case,  saying  that  the 
correct  test  of  the  right  to  priority  out  of  the  corpus  is  whether 
or  not  the  indebtedness  is  for  something  essential  to  keep  the 
railroad  in  operation;  "that  as  the  road  from  its  nature  and 
public  responsibilities  must  be  kept  a  going  concern,  whatever 
is  furnished  for  that  purpose  must  be  paid  regardless  of 
whether  there  is  income  or  whether  there  has  been  diversion 
of  income." 

The  rules  as  followed  by  the  courts  to-day  may  be  stated 
thus: 


FORECLOSURE   OF   RAILROAD   MORTGAGES       123 

1.  —  Any  current  debt  is  entitled  to  a  preference 

(a)  out  of  the  income  of  the  receivership,  regardless  of  whether  there 
is  any  diversion  of  income  before  or  after  the  receivership,  and 

(6)  out  of  the  corpus  of  the  mortgaged  property  to  the  extent  that 
there  has  been  diversion  of  income  during  the  receivership  or  for  a 
limited  time  before  the  receivership. 

2.  —  A  current  debt  the  payment  of  which  is  necessary  to  the  busi- 
ness of  the  road  is  entitled  to  a  preference  out  of  the  corpus  of  the  prop- 
erty whether  or  not  there  has  been  diversion  of  income  at  any  time 
before  or  during  the  receivership. 

The  preference  to  which  the  holder  of  a  current  debt  may 
be  entitled  is  not  confined  to  the  property  of  the  company 
with  which  the  creditor  contracted.  Thus  if  the  lessee  of 
the  property  of  a  company  buys  supplies  to  be  used  upon  the 
property  of  the  lessor  company,  the  creditor  is  entitled  to 
priority  of  payment  out  of  income  or  corpus,  as  the  case  may 
be,  of  the  lessor  company.1 

In  one  case  2  it  has  been  held  that  claims  of  current  creditors 
are  to  be  preferred  only  over  mortgage  creditors  and  not  over 
general  creditors.  In  the  New  York  City  Railway  litigation 
the  master,  the  circuit  judge  and  the  circuit  court  of  appeals 
declined  to  follow  this  ruling.  There  was  no  mortgage  by  the 
City  Company  and  the  receiver  of  the  City  Company  had  in 
his  hands  a  large  amount  of  assets  on  which  there  were  no  liens, 
unless  a  lien  attached  for  current  debts.  The  question  was 
whether  the  holders  of  current  debts  were  entitled  to  any  prefer- 
ence, and  if  so,  to  what  extent.  Judge  Lacombe  held,  and  his 
ruling  was  affirmed  by  the  Circuit  Court  of  Appeals,  that  cur- 
rent debts  were  entitled  to  preferred  payment  over  general  debts, 
and  out  of  any  assets  whether  corpus  or  income,  as  in  his 
opinion  it  is  only  where  a  creditor  is  asking  to  displace  a  lien  that 
it  is  necessary  to  go  into  the  question  of  diversion  of  income.3 

1  Virginia  and  Alabama  Coal  Company  v.  Central  Railroad  Company,  170  U.  S., 
355 ;  1898. 

8  Whelan  v.  Enterprise  Transportation  Company,  175  Fed.,  212,  1909. 

3  Pennsylvania  Steel  Company  v.  New  York  City  Railway  Company,  208  Fed., 
168,  182-3,  1913  ;  aff.  216  Fed.,  458,  471,  1914. 


124       FORECLOSURE   OF   RAILROAD   MORTGAGES 

Preferred  claims  are  often  spoken  of  as  six  months'  claims. 
Mr.  Justice  Holmes  uses  this  term  in  Gregg  v.  Metropolitan  Trust 
Company.  Under  the  decisions,  however,  all  the  meaning  that 
can  be  given  to  those  words  is  that  the  claim  must  not  be  very 
old.  In  Southern  Railway  v.  Carnegie  Steel  Company,  176  U.  S., 
257,  1900,  the  court  said  that  while  a  rule  limiting  the  claims  to 
those  accruing  within  six  months  did  justice  in  most  cases,  there 
was  no  absolute  rule  on  the  subject  and  older  claims  might 
under  the  circumstances  of  particular  cases  be  included  among 
preferred  claims. 

In  the  Carnegie  Steel  Company  case  it  appears,  page  272, 
that  interest  was  allowed  upon  the  entire  claim  by  the  lower 
courts  and  the  order  appealed  from  was  affirmed  by  the  United 
States  Supreme  Court.  This  was  followed  in  Penn.  Steel  Co.  v. 
N.  Y.  City  Ry.  Co.,  216  Fed.,  458,  471 ;  1914.  The  court  dis- 
cussed Thomas  v.  Railroad  Company,  149  U.  S.,  95, 1893,  which 
has  often  been  supposed  —  and  justly  —  to  hold  that  interest  on 
all  claims  ceased  from  the  time  of  the  appointment  of  a  receiver ; 
and  said  that  that  ruling  did  not  apply  where  the  fund  was 
large  enough  to  pay  principal  and  interest  of  all  claims  of  any 
given  class  entitled  to  a  preference  out  of  the  fund.  This  prin- 
ciple, the  court  said,  was  settled  by  American  Iron  Company  v. 
Seaboard  Air  Line  Railway  Company,  233  U.  S.,  261 ;  1914. 

The  principles  which  govern  the  right  to  intervene  in  a  fore- 
closure suit  are  simple  and  easily  applied.  But  one  who  ap- 
proaches the  subject  for  the  first  time  may  easily  be  confused 
or  even  misled  by  general  statements  in  the  cases  and  textbooks 
which  are  true  only  as  to  some  kinds  of  interventions  and  are 
untrue  as  to  other  kinds.  An  inference  may  be  drawn  from 
such  statements  that  permission  to  intervene  is  difficult  to  get ; 
that  the  consent  of  the  plaintiff  is  in  general  a  prerequisite; 
and  that  the  cases  are  in  hopeless  confusion  as  to  the  right  to 
intervene  of  one  with  a  paramount  title  —  by  which  I  mean  a 
right  antagonistic  or  superior  to  that  of  one  or  both  of  the 


FORECLOSURE   OF   RAILROAD   MORTGAGES        125 

parties ;  —  but  nothing  can  be  more  erroneous.  In  practice  a 
petition  to  intervene,  if  it  makes  anything  of  a  case,  is  nearly 
always  granted;  the  consent  of  a  plaintiff  is  seldom  a  pre- 
requisite ;  and  the  right  to  intervene  pro  interesse  suo  is  granted 
to  a  petitioner  asserting  a  paramount  title  almost  as  a  matter 
of  course. 

A  few  illustrations  may  make  clear  the  different  sorts  of  in- 
terventions that  are  usual  in  foreclosure  suits  and  the  different 
principles  applicable  to  them. 

A  company  mortgages  its  railroad  to  a  trustee  for  bondholders 
subject  to  all  rights  and  equities  which  exist  in  favor  of  A  against 
the  company.  Upon  default  the  trustee  brings  suit  to  foreclose 
the  mortgage  making  the  railroad  company  the  sole  defendant. 
A  petitions  to  be  allowed  to  intervene  and  become  a  party  defend- 
ant, in  order  that  the  question  of  what  his  rights  are  may  be  ad- 
judged and  the  decree  may  direct  that  the  entire  property  of  the 
railroad  be  sold  subject  to  his  rights  as  adjudged  by  the  decree ; 
or  that  it  be  sold  free  and  clear  of  all  those  rights,  a  certain 
amount  of  the  purchase  price  to  go  to  A.  The  position  the 
trustee  takes  upon  such  a  petition  depends  on  whether  he  thinks 
it  more  important  to  get  the  best  possible  price  at  the  sale  or 
to  get  a  speedy  decree.  The  trustee  may  say:  "The  railroad 
will  bring  a  better  price  if  the  purchaser  knows  exactly  what 
he  is  getting,  either  a  property  free  from  all  incumbrances  or 
with  an  incumbrance  in  favor  of  A,  the  exact  limits  of  which 
the  decree  defines ;  such  a  decree  can  only  be  made  if  the  prayer 
of  the  petition  be  granted  and  therefore  I  consent  that  A  be 
made  a  party  defendant."  Upon  that  consent  the  court  will 
always  allow  A  to  intervene  and  become  a  party  defendant. 
On  the  other  hand,  the  trustee  may  say :  "  I  am  in  a  great  hurry 
to  get  a  decree ;  the  bondholders  expect  to  buy  in  the  railroad 
at  foreclosure  sale  and  reorganize  the  property;  they  have 
agreed'  on  a  plan  or  reorganization  and  bankers  are  ready  to 
take  bonds  of  the  reorganized  company;  to  try  out  the  ques- 
tion of  what  the  rights  of  A  are,  or  whether  he  has  any,  may 


126       FORECLOSURE   OF  RAILROAD  MORTGAGES 

take  a  year  or  more,  and  by  the  time  the  matter  is  decided,  times 
may  be  bad  and  the  reorganization  impossible ;  the  bondholders 
are  quite  ready  to  take  the  title  subject  to  the  rights  of  A ;  and 
he  should  be  left  to  fight  out  later  with  the  reorganized  com- 
pany what  those  rights  are."  On  this  statement  the  court 
might  very  well  say  to  the  petitioner:  "As  long  as  the  com- 
plainant objects,  I  ought  not  to  delay  him  in  getting  the  sort 
of  a  decree  he  is  willing  to  take ;  you  are  not  deprived  of  any 
rights  by  not  being  allowed  to  become  a  party  defendant,  and, 
although  I  would  make  the  order  you  ask  if  the  plaintiff  were 
willing,  in  the  face  of  his  opposition  I  must  deny  your  petition." 
That  is  the  sort  of  case  the  court  was  referring  to  in  French  v. 
Gapen,  105  U.  S.,  509,  1881,  when  it  said  at  page  525 : 

"But  while  the  petitioners  were  not  in  fact  parties,  they  might 
with  propriety  have  been  made  such,  and  there  cannot  be  a  doubt 
that  if  they  had  intervened  before  the  decree  of  sale,  and  asked  to  be 
made  defendants,  it  would  have  been  within  the  power  of  the  court, 
with  the  consent  of  the  complainants  to  take  them  in." 

But  suppose  A  says  to  the  court :  "  I  am  in  a  hurry  too.  I 
ought  not  to  be  compelled  to  wait  till  this  litigation  is  over,  but 
the  order  of  the  court  does  compel  me  to  wait.  For  this  court 
has  exclusive  jurisdiction  over  the  railroad  and  you  refuse  to 
let  me  enforce  my  rights  against  it  here  by  denying  my  petition 
to  be  allowed  to  intervene  and  become  a  party  defendant." 

The  court  would  answer :  "  Not  at  all.  I  deny  you  leave  to 
intervene  and  become  a  party.  I  do  not  deny  you  permission 
to  enforce  your  rights  in  this  court.  I  give  you  permission  now 
to  intervene  pro  interesse  suo.  Under  that  sort  of  an  interven- 
tion you  do  not  become  a  party  complainant  or  defendant  to 
the  main  suit.  You  get  no  right  to  be  heard  on  the  issues  in- 
volved in  that  suit.  File  a  petition  setting  up  the  facts  as  to 
your  rights.  I  will  order  any  party  to  the  suit  who  thinks  he 
may  be  affected  by  your  claim  to  move  to  dismiss  your  petition 
or  answer  within  a  limited  time.  If  there  is  a  motion  to  dismiss 
I  will  pass  on  the  motion  promptly  myself.  If  there  is  an 


FORECLOSURE   OF   RAILROAD   MORTGAGES        127 

answer,  I  will  refer  it  to  the  master  and  you  may  bring  on  the 
master's  report  for  a  hearing  as  soon  as  you  and  the  other  side 
are  ready." 

So  whether  one  may  be  permitted  to  intervene  or  not  depends 
upon  the  sort  of  an  intervention  prayed  for.  An  intervention 
of  one  with  a  paramount  title  for  the  purpose  of  becoming  a 
party  defendant  is  usually  denied  if  the  complainant  objects; 
for  the  purpose  of  protecting  one's  interest  —  pro  interesse  suo, 
-is  usually  granted,  regardless  of  whether  complainant  con- 
sents or  opposes,  unless  it  complicates  the  main  suit  and  it  is 
perfectly  clear  that  the  petitioner's  rights  can  be  completely 
protected  in  some  other  way.  The  principle  is  plain  enough : 
a  complainant  ought  not,  without  his  consent,  to  be  involved 
in  controversies  with  a  stranger  which  will  delay  the  enforce- 
ment of  his  rights,  nor  ought  he,  by  refusing  his  consent,  to  be 
able  to  delay  the  stranger  in  the  enforcement  of  the  stranger's 
rights. 

In  foreclosure  suits  the  sort  of  intervention  which  the  court 
refuses  to  allow  if  complainant  objects  is  in  practice  not  com- 
mon. Where  there  is  such  a  case  the  complainant  is  often  quite 
as  willing  as  the  petitioner  to  have  the  prayer  granted. 

The  intervention  pro  interesse  suo  is  the  most  common  of 
all.1 

A  third  kind  of  intervention  is  common  also :  someone  who 
is  represented  by  a  party  to  the  record  —  a  bondholder  by  the 
trustees  of  the  mortgage,  a  stockholder  or  a  general  creditor  by 
the  railroad  company  —  asks  to  be  allowed  to  intervene  and  be- 
come a  party  plaintiff  or  defendant,  as  the  case  may  be.  As 
he  is  already  represented  what  facts  must  he  show  to  succeed  ? 
Clearly,  that  his  representative  is  not  doing  his  duty  or  by 
reason  of  conflicting  interests  is  not  in  a  position  to  do  his  duty. 
About  the  principle  governing  these  applications  there  is  no 

1  The  development  of  the  petition  pro  interesse  suo  from  the  examination 
pro  interesse  suo  and  of  the  "dependent"  bill  from  the  petition  pro  interesse  suo 
is  traced  in  Krippe ndorf  v.  Hyde,  110  U.  S.  276,  1884. 


128       FORECLOSURE    OF   RAILROAD   MORTGAGES 

conflict.  The  only  question  is  one  of  fact  —  is  the  representa- 
tive, already  a  party  to  the  suit,  failing  in  the  performance  of 
his  duty ;  is  his  position  such  that  he  must  in  all  probability 
fail?  If  so,  the  applicant  is  allowed  to  intervene  and  become 
a  party  plaintiff  or  defendant ;  if  not,  the  application  is  denied. 
Thus  Judge  Taf t  said :  "  The  refusal  of  the  board  of  directors 
to  make  a  valid  and  equitable  defense  to  the  foreclosure  of  the 
mortgage  and  a  sale  of  all  of  the  franchises  and  property  belong- 
ing to  the  road  when  the  existence  of  such  a  defense  is  brought 
to  their  knowledge  would  of  itself  constitute  such  gross  neglect 
or  fraud  on  their  part  as  to  require  the  court  to  permit  their 
interested  cestuis  que  tnistent,  the  stockholders,  to  make  the  de- 
fense themselves."  1  In  a  case 2  where  one  trust  company  was 
trustee  under  three  different  mortgages  and  brought  one  suit  to 
foreclose  all  three,  bondholders  under  the  second  and  third 
mortgages  were  permitted  to  intervene  as  defendants ;  the  court 
saying  "  it  is  manifestly  impossible  for  the  trustee  to  fairly  rep- 
resent both  sides  in  the  resulting  controversies  except  by  assum- 
ing such  a  position  of  neutrality  as  would  seriously  affect  the 
force  with  which  such  conflicting  interests  are  to  be  presented 
for  the  consideration  of  the  court.5' 

The  court  may  allow  a  person  claiming  some  or  all  of  the 
property  in  its  possession  to  proceed  by  an  action  at  law  or  by 
intervening  petition  or  in  a  proper  case  by  bill.  Where  the 
court  allows  the  claimants  to  proceed  by  intervention  in  the 
suit,  if  the  intervention  is  based  on  a  legal  cause  of  action  it 
may  be  submitted  on  proper  issues  to  a  jury.  In  such  a  case 
the  verdict  is  advisory  and  may  be  disregarded  by  the  court 
in  whole  or  in  part.3  The  usual  method,  however,  even  where 
the  claim  is  a  legal  one,  of  disposing  of  an  intervention,  is  by 
reference  to  a  master. 

1  Farmers'  Loan  &  Trust  Co.  v.  Toledo,  A.  A.  &  N.  M.  Ry.  Co.,  67  Fed.,  49; 
1895. 

•  Fanners'  Loan  &  Trust  Co.  v.  Northern  Pacific  R.  Co.,  70  Fed.,  423 ;  1895. 

»  Kohn  v.  McNulta,  147  U.  S.,  238 ;  1893.  Clyde  v.  Richmond  &  D.  R.  Co.,  72 
Fed.  121 ;  1896  ;  C.  C.  A.,  4th  Circuit. 


FORECLOSURE   OF   RAILROAD   MORTGAGES        129 

It  is  sometimes  said  that  to  proceed  by  intervention  is  more 
expeditious  than  by  bill.  This  is  probably  so  in  matters  of 
minor  importance ;  but  not  so  in  a  matter  like  the  foreclosure 
of  a  mortgage  covering  a  substantial  part  of  a  railroad.  At  any 
rate,  the  fact  that  trustees  of  mortgages  always  prefer  to  pro- 
ceed by  bill  shows  that  this  is  their  opinion.  The  reason  in 
their  mind  is  that  everything  is  more  clearly  defined  about  a 
suit  to  foreclose  than  an  intervention  for  that  purpose.  The 
parties  to  the  foreclosure  suit  are  those  named  in  the  bill  and 
such  others  as  the  court  makes  parties  by  order;  the  parties 
to  the  creditor's  bill  are  not  from  that  fact  parties  to  the  fore- 
closure bill,  even  after  an  order  is  made  consolidating  the  two 
suits.  On  the  other  hand,  while  it  may  be  that  the  court  has 
the  right  to  confine  the  defense  to  a  foreclosure  by  intervening 
petition  to  such  parties  as  would  be  necessary  parties  to  a  bill, 
it  is  generally  assumed  that  all  parties  to  the  main  suit  have 
a  right  to  defend.  Every  party  to  the  suit  in  which  the  in- 
tervening petition  is  filed  is  bound  to  take  notice  of  every 
intervention.1 

In  what  cases,  if  any,  does  an  appeal  lie  from  an  order  deny- 
ing or  granting  a  motion  to  intervene  ? 

In  the  federal  courts  "an  appeal,  as  a  general  rule,  lies  only 
from  a  final  decree."  2  But  there  may  be  many  final  decrees, 
for  the  purposes  of  appeal,  in  an  equity  suit.  Every  decree  is 
a  final  decree  which  disposes  finally  of  someone's  claim.  In 
Central  Trust  Co.  v.  Grant  Locomotive  Works,  135  U.  S.,  207, 1890, 
the  Court  gives  several  illustrations  of  such  final  decrees :  an 
order  for  the  allowance  of  costs  and  expenses  to  a  complainant 
suing  on  behalf  of  a  trust  fund,  a  decree  in  a  foreclosure  suit 
fixing  the  compensation  to  be  paid  to  the  trustees  of  the 

1  McLeod  v.  City  of  New  Albany,  66  Fed.,  378,  381 ;  1895 ;  C.  C.  A.,  7th 
Circuit,  "Being  parties  to  the  suit,  they  were  in  fact  parties  to  the  intervening 
petition."     Central  Trust  Company  v.  Madden,  70  Fed.,  451 ;  1895 ;   C.  C.  A., 
4th  Circuit. 

2  U.  S.  Fidelity  Co.  v.  Bray,  225  U.  S.,  205,  214 ;  1914.    McLish  v.  Roff,  141 
U.  S.,  661 ;  1891. 

K 


130       FORECLOSURE   OF   RAILROAD   MORTGAGES 

mortgage,  a  decree  upon  an  intervening  petition  in  respect 
to  cars  used  by  a  railroad  company  under  a  contract  with  the 
manufacturers. 

Plainly  an  order  granting  a  motion  to  intervene  is  not  a  final 
disposition  of  the  claim  of  an  intervenor,  and  therefore  from  it 
an  appeal  never  lies. 

The  question  of  the  appealability  of  orders  denying  motions 
to  intervene  is  not  so  easily  disposed  of.  Ex  parte  Cutting, 
94  U.  S.,  14,  1876,  held  that  an  appeal  did  not  lie  from  an 
order  refusing  stockholders  leave  to  intervene  and  to  become 
parties  to  a  foreclosure  suit,  the  court  saying,  "that  was  only 
a  motion  in  the  cause  and  not  an  independent  suit  in  equity 
appealable  here."  By  an  "independent  suit"  the  court  doubt- 
less meant  what  is  described  in  Williams  v.  Morgan,  111  U.  S., 
684,  1884,  at  699,  as  "a  matter  distinct  from  the  general  sub- 
ject of  the  litigation  —  a  matter  by  itself  which  affected  only 
the  parties  to  the  particular  controversy  and  those  whom  they 
represented."  The  court  also  said  in  Exparte  Cutting  that  such 
an  application  "is  always  addressed  to  the  sound  judicial  dis- 
cretion of  the  court."  In  Credits  Commutation  Company  v. 
U.  S.,  177  U.  S.,  311,  1900,  the  facts  were  that  a  company 
claiming  to  have  the  right  to  connect  its  tracks  when  completed 
with  those  of  a  railroad  company,  against  which  suits  were  pend- 
ing to  foreclose  a  mortgage,  petitioned  to  be  allowed  to  inter- 
vene in  those  suits;  the  lower  court  denied  the  application; 
the  Circuit  Court  of  Appeals  held  that  there  was  no  right 
of  appeal;  and  the  Supreme  Court  sustained  the  Court  of 
Appeals.  The  Supreme  Court  said  the  petitioner  had  a  good 
remedy  by  independent  suit ;  therefore  the  order  was  not  final 
and  was  discretionary ;  only  where  the  denial  of  the  petition  to 
intervene  is  a  practical  denial  of  relief  to  which  the  intervenor 
is  fairly  entitled  and  which  he  can  only  obtain  by  intervention 
is  the  order  of  denial  final  and  therefore  appealable.  "  Cases  of 
this  sort,"  says  the  court,  "are  those  where  there  is  a  fund  in 
court  undergoing  administration  to  which  a  third  party  asserts 


FORECLOSURE    OF   RAILROAD   MORTGAGES        131 

some  right  which  will  be  lost  in  the  event  that  he  is  not  allowed 
to  intervene  before  the  fund  is  dissipated." 

It  would  seem  to  follow  from  these  opinions  that 

(1)  orders  denying  the  right  to  intervene  and  to  become  a 
party  complainant  or  defendant,  whether  to  enforce  a  paramount 
right  or  to  protect  rights  which  it  is  alleged  that  the  party  to  the 
record  representing  the  petitioner  has  failed  properly  to  protect, 
are  not  appealable,  and 

(2)  orders  denying  a  petition  to  intervene  pro  interesse  suo 
are  sometimes  appealable  and  sometimes  not,  the  test  being 
whether  or  not  the  petitioner  has  any  other  remedy  that  is  of 
real  value. 

But  (1)  cannot  be  considered  as  an  accepted  rule  in  view 
of  a  decision  of  the  Circuit  Court  of  Appeals  for  the  Second 
Circuit.1  The  suit  was  to  foreclose  a  collateral  trust  mort- 
gage. A  bondholder  petitioned  to  be  allowed  to  intervene  as  a 
party  defendant,  not  for  the  purpose  of  setting  up  any  defense 
to  the  mortgage,  but  for  the  purpose  of  objecting  to  the  manner 
in  which  the  sale  was  to  be  made.  The  bondholder  alleged  that 
the  trustee  was  not  properly  representing  him  and  other  bond- 
holders who  had  not  deposited  their  bonds  under  a  plan  of  re- 
organization with  a  bondholders'  committee,  of  which  the  presi- 
dent of  the  trustee  was  a  member.  On  an  appeal  from  an  order 
denying  the  petition  of  the  bondholder  the  order  was  reversed 
and  the  petition  granted.  The  court  was  of  the  opinion  that  the 
subject  matter  of  the  mortgage  might,  after  sale,  be  scattered 
so  as  to  make  an  independent  action  by  the  bondholder  to  set 
aside  the  sale  of  no  practical  value. 

I  turn  now  from  these  incidents  of  the  foreclosure  suit  to  the 
suit  itself  —  what  is  being  done,  while  the  rights  of  preferred 

1  Central  Trust  Co.  v.  Chicago,  R.  I.  &  P.  R.  Co.,  218  Fed.,  336, 1914,  C.  C.  A., 
2d  Circuit.  See  Investment  Registry  v.  Chicago  &  Milwaukee  Electric  Ry.  Co., 
213  Fed.,  492,  1914. 


132       FORECLOSURE   OF   RAILROAD   MORTGAGES 

creditors  and  intervenors  are  being  adjudicated,  toward  the  ac- 
complishment of  its  purposes :  the  foreclosure  of  the  mortgage 
and  the  sale  of  the  mortgaged  property? 

Often,  for  a  long  time,  nothing.  Intervenors  may  be  claim- 
ing to  own  valuable  portions  of  the  terminals  of  the  company 
or  of  its  line;  persons  may  be  claiming  preferences  for  large 
amounts;  and  the  trustee  and  the  bondholders  may  deem  it 
essential  to  have  these  questions  settled  before  a  sale  of  the 
property  is  ordered.  Or  the  railroad  may  have  been  kept  out  of 
the  hands  of  receivers  too  long,  and  in  the  struggle  of  the  rail- 
road company  to  meet  its  obligations  out  of  insufficient  earnings, 
its  equipment  may  have  become  inadequate  and  its  roadbed  un- 
safe. With  the  railroad  in  the  possession  of  the  court  earnings 
formerly  used  for  interest  and  moneys  borrowed  on  receivers* 
certificates  may  be  devoted  to  the  improvement  of  the  property. 
Bondholders  and  stockholders  alike  may  wish  to  see  such  ex- 
penditures continue  for  a  year  or  two  in  order  to  find  out  what 
the  railroad  is  capable  of  under  favorable  financial  conditions. 
For  these  and  other  reasons  no  one,  it  may  be,  concerns  himself 
with  thoughts  of  foreclosure  and  sale.  In  such  circumstances 
not  infrequently  the  railroad  company  fails  to  answer  the  bill ; 
and  the  complainant  nevertheless  takes  no  step  to  enter  a  decree. 
It  is  usually  well,  however,  for  the  trustee  of  the  mortgage,  if 
the  railroad  company  defaults  in  pleading,  to  enter  a  decree  pro 
confesso  at  the  earliest  opportunity.  There  is  no  legal  reason 
why  a  creditor  or  stockholder  should  be  allowed  to  intervene 
in  order  to  defend  in  behalf  of  the  railroad  company  on  any  less 
complete  showing  of  a  good  defense  before  decree  than  after; 
as  a  matter  of  fact,  however,  when  it  is  a  question  of  opening  a 
default  the  rule  that  such  a  showing  must  be  made  seems  to  be 
applied  with  more  strictness,  and  it  is  easy  for  the  court  to  say 
to  a  bondholder,  as  Judge  Lurton  did  in  Central  Trust  Company 
v.  Cincinnati,  H.  &  D.  Railway  Company,  169  Fed.,  466,  1908, 
where  the  holders  of  $2,000,000  of  bonds  petitioned  for  leave  to 
intervene  and  become  defendants  and  to  file  an  answer  and 


FORECLOSURE   OF   RAILROAD   MORTGAGES        133 

cross  bill  for  the  purpose  of  having  it  declared  that  practically 
all  the  remaining  bonds  of  the  same  issue,  some  $15,000,000, 
were  invalid : 

"It  is  not  necessary  before  a  decree  for  sale  under  such  a  railway 
mortgage  that  the  validity  or  ownership  of  every  bond  secured  by  it  shall 
be  first  determined.  .  .  .  The  mortgagor  company  makes  no  defense 
and  a  decree  pro  confesso  has  been  taken  long  since.  .  .  .  There  exists, 
then,  all  that  is  necessary  for  a  decree  nisi.  It  is  undoubtedly  proper 
practice,  if  not  always  essential,  that  such  a  decree  nisi  shall  definitely 
disclose  the  nature  of  the  default  and  the  amount  of  principal  and 
interest  due  as  a  consequence.  This  is  to  fix  the  amount  which  the 
mortgagor  must  pay  in  to  prevent  a  sale,  for  it  is  necessary  that  a 
reasonable  time  be  allowed  for  such  redemption,  for  otherwise  a  valu- 
able right  of  the  mortgagor  may  be  destroyed.  But  in  order  to  de- 
clare and  determine  the  amount  of  bonds  due  and  outstanding  and  the 
amount  of  interest  due  and  unpaid,  it  is  not  essential  that  the  bonds 
and  coupons  shall  be  produced  and  proved.  The  necessary  declara- 
tion of  the  amount  to  be  paid  in  order  that  the  mortgagor  may  redeem 
is  not  regarded  as  final  or  conclusive  upon  the  point  of  the  amount 
of  the  debt,  for  it  is  well  settled  that  any  holder  of  such  bonds  who 
presents  them  for  a  dividend  out  of  the  proceeds  of  sale  may  challenge 
the  claim  of  any  other  when  the  allowance  will  diminish  his  own  share 
in  the  fund.  .  .  .  Indeed  it  is  proper  in  any  such  decree  to  require 
that  all  holders  of  bonds  shall  present  them  to  a  special  master  and 
that  all  persons  claiming  a  right  to  share  in  the  proceeds  of  sale  shall 
have  the  right  to  challenge  the  right  of  anyone  presenting  a  bond  to 
the  special  master  for  such  purpose." 

But  if  a  decree  had  not  been  entered  the  court  might  well 
have  hesitated  before  denying  the  petitioners  the  right  to  have 
it  settled  before  the  foreclosure  sale  whether  the  total  amount 
of  valid  bonds  was  two  million  dollars  or  seventeen  million. 
Great  harm  may  be  done  to  a  bondholder  if  it  is  not  decided 
before  the  sale  what  bonds  are  valid  and  what  invalid.  Let  us 
suppose,  for  instance,  that  in  the  case  from  which  I  have  just 
quoted,  the  mortgaged  property  was  actually  worth  one  million 
dollars,  and  that  in  all  probability  the  property  in  a  few  years 
would  be  worth  two  million  dollars.  The  petitioners  owning 
the  two  million  dollars  of  bonds  might  be  willing  to  buy  it  in 


134       FORECLOSURE   OF   RAILROAD   MORTGAGES 

for  that  amount,  if  their  bonds  were  the  only  valid  ones,  for  in 
that  event  all  the  cash  they  would  need  as  purchasers  would 
be  an  amount  for  expenses,  allowances,  and  so  on,  as  they 
could  make  payment  of  the  rest  of  the  purchase  price  by  credit- 
ing the  amount  of  it  on  their  bonds.  Or  if  they  did  not  care 
to  buy  the  property  but  wished  merely  to  get  as  much  cash  as 
possible  for  their  bonds,  they  could  bid  up  to  a  million  dollars 
and  let  the  property  go  at  that  figure  to  some  other  bidder  and 
receive  from  the  proceeds  of  the  sale  a  dividend  of  approxi- 
mately fifty  per  cent. 

If,  however,  it  is  unsettled  at  the  time  of  the  sale,  whether 
the  other  fifteen  million  dollars  of  bonds  are  valid  or  not,  the 
holders  of  the  two  million  dollars  of  bonds  cannot  bid  without 
running  the  risk  of  ultimately  being  held  liable  to  pay  fifteen- 
seventeenths  of  their  bid  in  cash.  This  means  that  the  holders  of 
the  two  million  dollars  of  bonds  are  practically  deprived  not  only 
of  their  right  to  take  a  chance  of  getting  payment  in  full  in  a  few 
years,  but  of  a  certainty  of  getting  a  dividend  of  fifty  per  cent 
in  cash  at  once,  for  against  a  committee  representing  holders 
of  the  fifteen  million  dollars  of  bonds,  the  holders  of  the  two 
million  dollars  of  bonds  will  not  dare  to  bid  even  one  million 
dollars,  still  less  two  million,  with  the  possibility  that  they  may 
be  called  upon  to  pay  most  of  the  bid  in  cash ;  nor  will  any  out- 
side purchaser  appear  at  the  sale  because  everyone  knows  the 
committee  will  outbid  everyone  else.  The  committee  will  con- 
sequently be  able  to  bid  in  the  property  at  less  than  its  value 
say  five  hundred  thousand  dollars,  so  that  even  if  the  two  million 
dollars  of  bonds  are  ultimately  held  to  be  the  only  valid  ones, 
the  holder  will  receive  a  dividend  of  less  than  twenty-five  per 
cent.  Nor  can  this  injustice  to  the  minority  bondholders  be 
remedied  by  fixing  a  price  in  the  decree  below  which  the  property 
shall  not  be  sold,  for  such  an  upset  price  could  hardly  be  greater 
than  one  million  dollars,  the  value  of  the  property ;  and  even 
if  it  were  fixed  and  obtained  the  minority  holders  would  have 
lost  the  chance  of  making  the  face  of  their  bonds  by  buying  in 


FORECLOSURE   OF   RAILROAD   MORTGAGES        135 

the  property.  Moreover,  fixing  an  upset  price  and  getting  it 
are  two  different  things.  If  no  one  bid  the  amount  fixed  the 
court  would  have  to  reduce  it. 

It  is  only  in  a  limited  number  of  cases  such  as  where  the 
mortgage  and  the  bonds  are  absolutely  void  under  some  con- 
stitutional or  statutory  provision,  or  the  bonds  have  been  fraud- 
ulently issued  and  are  in  the  hands  of  the  original  holders  that 
there  is  a  real  defense  to  a  foreclosure  suit;  for  where  the 
power  to  make  the  mortgage  or  the  bonds  exists,  defects  in  the 
mode  of  executing  the  power  such  as  irregularities  in  calling 
meetings  of  stockholders  to  authorize  the  mortgage  or  the  bonds, 
or  even  complete  failure  to  hold  such  meetings,  are  waived  by 
payment  of  interest  for  several  years  1  and  other  acts  of  ratifica- 
tion and  acquiescence. 

The  railroad  company  frequently  neither  defaults  nor  puts 
in  an  answer,  but  gets  from  the  trustee  extensions  of  time  to 
answer;  stockholders  and  general  creditors  having  notified  it 
that  unless  the  opportunity  to  put  in  a  defense  is  kept  open 
until  a  plan  of  reorganization  satisfactory  to  them  is  proposed 
by  the  bondholders,  they  will  ask  to  be  allowed  to  intervene 
on  the  ground  that  the  railroad  company  is  in  collusion  with 
the  trustee  in  not  setting  up  some  alleged  defense.  Sometimes 
a  plan  satisfactory  to  all  parties  is  soon  agreed  upon  and  a  decree 
is  entered  without  opposition;  sometimes  the  bondholders, 
general  creditors  and  stockholders  are  obstinate,  a  change  is 
made  in  the  directors  of  the  railroad  company,  or  stockholders 
are  allowed  to  intervene,  and  an  answer  is  filed  attacking  the 
validity  of  the  mortgage  or  the  bonds.  Evidence  is  taken ;  and 
negotiations  continue.  Finally  the  parties  interested  get  closer 
together ;  the  times  are  favorable  for  launching  the  reorganized 
company,  selling  bonds  to  raise  money  for  the  improvement  of 
the  property,  and  so  on,  or  there  is  fear  that  bad  times  are 

1  Farmers'  Loan  &  Trust  Co.  v.  Toledo,  A.  A.  &  N.  M.  R.  Co.,  67  Fed.,  49, 
at  p.  59 ;  1895. 


136       FORECLOSURE   OF   RAILROAD   MORTGAGES 

approaching,  and  everyone  is  anxious  to  end  the  litigation  and 
get  the  property  out  of  the  courts ;  the  bondholders  raise  their 
offer  to  the  stockholders,  the  stockholders  lower  their  demands, 
and  all  come  to  an  agreement;  enough  additional  evidence  is 
added  to  justify  a  decree ;  and  the  decree  is  entered. 

All  that  is  necessary  for  a  decree  is  to  prove  that  the  mort- 
gage was  executed  and  delivered  and  that  the  bonds  were 
executed  and  certified  and  are  outstanding.  Ordinarily,  the 
method  of  proof  is  as  follows :  the  mortgage  is  produced  from 
the  files  of  the  trustee ;  then  the  secretary  of  the  railroad  com- 
pany and  the  secretary  of  the  trustee  or  their  respective  assist- 
ants and  someone  who  presented  coupons  and  made  demands 
for  payment  of  interest  and  of  principal  are  called  as  witnesses : 
by  them  it  is  proved  that  the  signatures  and  the  seal  of  the 
company  are  genuine ;  that  the  mortgage  was  recorded  in  vari- 
ous states  and  counties,  the  fact  usually  appearing  from  the 
endorsements  on  it ;  that  meetings  of  stockholders  and  directors 
were  held  and  at  them  resolutions,  which  are  put  in  evidence, 
were  adopted  authorizing  the  mortgage  and  the  bonds;  that 
bonds  to  a  certain  amount  were  executed  by  the  company,  cer- 
tified by  the  trustee,  and  issued,  under  the  provisions  of  the 
mortgage,  to  take  up  other  bonds  of  the  company  or  to  pay 
debts  or  to  raise  money;  that  interest  was  paid  on  them  for 
several  years ;  that  they  appeared  as  outstanding  liabilities  in 
the  annual  reports  sent  to  the  stockholders  of  the  company; 
that  default  was  made  in  the  payment  of  interest  after  demand 
and  subsequently  the  principal  was  declared  due  by  the  trustee 
and  default  was  made  in  the  payment  of  that. 

The  testimony  of  the  officials  of  the  railroad  and  the  trustee 
are  frequently  to  what  they  know  only  from  the  records  of  their 
offices,  the  records  themselves  being  presented  for  inspection. 
It  is  not  necessary  to  produce  the  bonds  themselves  or  to  prove 
who  the  owners  are;  all  that  being  reserved  for  the  hearing 
before  the  master  on  the  distribution  of  the  proceeds  of  sale, 
when,  notwithstanding  by  the  decree  of  foreclosure  it  may  have 


FORECLOSURE   OF   RAILROAD   MORTGAGES       137 

been  adjudged  that  the  whole  issue  is  valid  and  outstanding, 
every  holder  is  at  liberty  to  attack  the  validity  of  the  bonds  of 
every  other  holder. 

When  there  is  a  contest,  what  is  the  procedure?  Formerly 
almost  always  an  order  of  reference  was  made  to  a  master  to 
take  testimony  and  report.  The  master  took  testimony  where- 
ever  and  whenever  it  was  convenient  for  counsel.  The  new 
rules  provide  that  "  In  all  trials  in  equity  the  testimony  of  wit- 
nesses shall  be  taken  orally  in  open  court,  except  as  otherwise 
provided  by  statute  or  these  rules,"  and  "save  in  matters  of 
account  a  reference  to  a  master  shall  be  the  exception,  not  the 
rule,  and  shall  be  made  only  upon  a  showing  that  some  excep- 
tional condition  requires  it."  Nevertheless  it  is  likely  that 
the  manner  of  trying  a  contested  foreclosure  suit  will  remain  as 
before,  by  a  reference  to  a  master. 

Masters'  reports  are  of  two  kinds  : 

(a)  What  may  be  called  the  ordinary  report  of  a  master  in  chancery 
under  an  order  of  reference  which  the  court  has  power  to  enter  over  the 
opposition  of  any  or  all  of  the  parties ;  and 

(6)  A  report  made  by  a  master  under  an  order  to  hear  and  decide 
all  the  issues  in  a  case.  Such  an  order  of  reference  can  be  made  by 
the  court  only  upon  consent  of  all  the  parties.1 

What  is  the  weight  to  be  given  the  findings  in  report  (a)  ? 
Statements  can  be  found  in  the  cases  and  textbooks  answering 
this  question  in  various  ways ;  it  is  said  that  the  report  is  ad- 
visory only ; 2  that  its  "  office  is  to  present  the  case  to  the  court 
in  such  a  manner  that  intelligent  action  may  be  there  had,"  3 
and  that  while  the  findings  of  a  master  are  not  absolutely  bind- 
ing upon  the  court,  there  is  a  presumption  in  their  favor  and 
they  will  not  be  set  aside  or  modified  in  the  absence  of  some 
clear  error  or  mistake.4  A  finding  on  a  disputed  question  of 

1  Kimberly  v.  Arms,  129  U.  S.,  512;  1889. 

*  Boesch  v.  Graff,  133  U.  S.,  697,  705 ;  1890. 

3  North  Carolina  R.  R.  Co.  v.  Swasey,  23  Wall,  405,  410 ;  1874. 

*  Boesch  v.  Graff,  133  U.  S.,  697,  705 ;  1890. 


138       FORECLOSURE    OF   RAILROAD   MORTGAGES 

fact  it  is  said  will  not  be  disregarded,  unless  the  finding  "ap- 
pears to  be  palpably  wrong  by  the  most  persuasive  weight  of 
evidence."  1  It  may,  perhaps,  be  said  that  the  court  gives  to 
the  findings  in  what  I  have  called  the  ordinary  report  of  a  master 
the  weight  that  the  Appellate  Division  of  the  New  York  Supreme 
Court  gives  to  the  findings  of  a  lower  court  in  an  equity  case. 

When  the  report  of  a  master  is  confirmed  by  the  court,  the 
findings  are  not  necessarily  conclusive  on  the  court  of  appeals. 
All  that  can  be  said  is  that  the  confirming  of  the  report  gives 
the  findings  added  weight.  In  a  case  where  the  court  of  ap- 
peals set  aside  the  report  of  a  master,  the  court  said  that  it  was 
not  unmindful  of  the  rule  that  the  findings  of  a  master  concurred 
in  by  the  court  to  which  they  were  reported  were  presumptively 
correct  and  would  be  permitted  to  stand  unless  there  was  an 
obvious  error  of  law  or  important  mistake  of  fact,  but  that  a 
master's  findings  have  not  the  force  of  a  verdict  or  of  the  report 
of  a  referee,  and  on  exceptions  thereto  the  court  must  determine 
by  its  own  judgment  the  controversy  presented,  and  on  appeal 
the  court  of  review,  of  course,  has  the  same  power  and  respon- 
sibility.2 

I  have  said  that  a  reference  to  a  master  to  hear  and  decide  all 
the  issues  can  only  be  made  on  consent  of  all  parties.  When  so 
made  the  findings  of  fact  are  more  conclusive  than  those  in  an 
ordinary  master's  report;  and  have,  what  the  circuit  court  of 
appeals  says  the  latter  have  not,  the  force  of  a  verdict  or  of  the 
report  of  a  referee.  In  a  case  where  the  order  of  reference  made 
by  consent  of  parties  was  "  to  hear  said  causes  and  report  to  this 
court  his  findings  of  fact  and  conclusions  of  law"  the  Supreme 
Court  said : 

"...  we  think  that  his  finding,  so  far  as  it  involves  questions  of  fact, 
is  attended  by  a  presumption  of  correctness  similar  to  that  in  the  case 
of  a  finding  by  a  referee,  the  special  verdict  of  a  jury,  the  findings  of  a 
Circuit  Court  in  a  case  tried  by  the  court  under  Revised  Statutes, 

1  Fordyce  v.  R.  R.  Co.,  145  Fed.,  544,  557;  1906. 

2  Bosworth  v.  Hook,  77  Fed.,  686 ;  1897. 


FORECLOSURE   OF   RAILROAD   MORTGAGES        139 

Section  649,  or  in  an  admiralty  cause  appealed  to  this  court.  In  neither 
of  these  cases  is  the  finding  absolutely  conclusive,  as  if  there  be  no  testi- 
mony tending  to  support  it ;  but  so  far  as  it  depends  upon  conflicting 
testimony,  or  upon  the  credibility  of  witnesses,  or  so  far  as  there  is  any 
testimony  consistent  with  the  finding,  it  must  be  treated  as  unassail- 
able." l 

Out  of  a  creditor's  bill  or  of  a  bill  to  foreclose  a  mortgage 
other  suits  may  arise  before  the  entering  of  a  decree  of  sale. 
There  may  be  several  mortgages  of  the  same  railroad  company 
in  default,  two  divisional  mortgages  and  a  general  mortgage 
covering  the  entire  property  of  the  railroad  company.  Each 
divisional  mortgagee  may  claim  priority  of  lien  upon  some  par- 
ticular portion  of  the  road.  If  one  of  the  divisional  mortgagees 
is  the  first  to  begin  a  foreclosure  suit,  it  makes  the  other  divi- 
sional mortgagee  and  the  general  mortgagee  parties  defendant. 
If  either  of  these  defendants  wishes  to  foreclose  its  mortgage  it 
files  what  used  to  be  called  a  cross  bill  and  is  now  —  or  perhaps 
it  is  safer  to  say  —  may  be  under  equity  rules  30,  and  31,  a 
set-off  or  counter-claim.  A  cross  bill  is  a  bill  filed  by  a  party 
defendant  to  an  original  bill  against  some  or  all  of  the  other 
parties  to  the  bill.  Defendants  to  the  original  bill  may  be  resi- 
dents of  the  same  state  and  in  the  cross  bill  be  on  opposite 
sides;  the  federal  court  nevertheless  has  jurisdiction.  Shields 
v.  Barrow,  17  How.,  129,  145, 1854,  is  a  leading  case  to  the  effect 
that  no  new  party  may  be  brought  in  by  cross  bill,  the  reason 
given  being  that  to  allow  it  would  open  the  door  for  the  indefinite 
extension  of  the  jurisdiction  of  the  federal  courts.  This  reason 
seems  to  have  no  application  to  cross  bills  in  cases  where  the 
court  has  possession  of  the  property,  because  that  mere  fact  ex- 
tends the  jurisdiction  to  all  suits  for  the  possession  or  control  of 
the  property.  In  practice  it  has  not  been  uncommon  to  bring 
in  without  objection  new  parties  as  defendants  to  cross  bills. 

We  now  come  to  the  decree. 

In  the  preparation  of  a  decree  which  is  to  be  entered  both  in 

1  Davis  v.  Schwartz,  155  U.  S.,  631 ;  1895. 


140       FORECLOSURE   OF   RAILROAD   MORTGAGES 

the  creditor's  suit  and  the  foreclosure  suit,  it  is  necessary  to  have 
in  mind  the  disposition  of  three  funds : 

1.  the  moneys  in  the  hands  of  the  receiver; 

2.  the  proceeds  of  the  sale  of  the  mortgaged  property  and,  if  more 
than  one  mortgage  is  being  foreclosed,  the  proceeds  of  the  properties 
covered  by  the  respective  mortgages,  and 

3.  the  proceeds  of  the  unmortgaged  properties ; 

and  the  rights  and  obligations  of  the  following  persons  or  sets 
of  persons : 

1.  the  trustee  of  the  mortgage; 

2.  bondholders; 

3.  receivers; 

4.  holders  of  receivers'  certificates  and  other  creditors  of  the  re- 
ceivers ; 

5.  intervenors; 

6.  preferred  creditors ; 

7.  other  creditors ; 

8.  the  railroad  company ; 

9.  the  purchaser. 

If  the  decree  says  nothing  about  the  earnings  in  the  hands 
of  the  receiver  they  do  not  pass  to  the  purchaser,  but  are  dis- 
tributable, so  far  as  they  are  not  applied  to  the  payment  of  pref- 
erential claims,  among  the  bondholders.  Sometimes  the  decree 
provides  that  the  receivers  shall  turn  such  earnings  over  to  the 
purchaser. 

The  proceeds  of  the  property  covered  by  the  mortgage  or 
mortgages,  as  the  case  may  be,  the  decree  gives  to  the  bond- 
holders entitled  thereto,  usually,  but  not  always,  providing,  as 
we  shall  see  later,  that  there  shall  first  be  paid  out  of  such  pro- 
ceeds the  receivers'  indebtedness  and  preferred  claims. 

The  proceeds  or  property  not  covered  by  the  mortgage  or 
mortgages,  the  decree  provides  shall  be  distributed  among  all 
creditors  entitled  to  share  therein.  Bondholders  have  the  same 
right  to  share  as  other  creditors.  The  question  whether  pre- 
ferred claims  which  are  entitled  to  be  paid  out  of  the  corpus 
should  be  paid  out  of  the  unmortgaged  property  rather  than 


FORECLOSURE   OF   RAILROAD   MORTGAGES        141 

the  mortgaged,  has  not  been  much  discussed ;  usually  no  one  is 
interested  in  raising  it,  as  the  value  of  the  unmortgaged  property 
is  small,  the  amount  for  which  the  bondholders  are  entitled  to 
prove  against  the  unmortgaged  assets  is  very  large  in  propor- 
tion to  the  unsecured  debts,  and  the  bondholders  and  unsecured 
creditors  are  parties  to  the  same  reorganization  agreement. 

In  theory  the  railroad  company  may  be  able  to  raise  the  money 
necessary  to  save  its  property  from  sale  and  therefore  the  decree 
should  fix  the  exact  amount,  whether  due  to  bondholders  or  to 
preferred  creditors  or  as  allowances  to  receivers  and  trustees  and 
counsel,  upon  payment  of  which  the  company  may  get  its  rail- 
road out  of  the  hands  of  the  court.  In  theory  too,  the  property 
will  bring  a  higher  price  if  the  decree  describes  with  precision 
what  is  to  be  sold  and  what  the  rights  and  liabilities  of  the  pur- 
chaser are  to  be  than  if  anything  is  left  unsettled ;  therefore,  in 
order  to  get  the  most  for  the  railroad  company  and  its  creditors, 
the  decree  should  be  so  framed  as  to  tell  intending  bidders 
exactly  what  they  will  get  if  they  buy  and  exactly  what  respon- 
sibility in  dollars  and  cents  they  are  assuming  when  they  bid. 

But  in  practice  such  precision  in  the  decree  is  found  to  be 
unnecessary,  for  the  court  and  everyone  else  know  that  the  rail- 
road company  cannot  possibly  get  the  money  to  pay  what  it 
owes ;  and  they  know  in  ninety-nine  cases  out  of  a  hundred  that 
there  will  be  only  one  bidder.  A  railroad  mortgage  securing 
bonds  to  the  amount  of  fifty  million  dollars  is  foreclosed  in  this 
country  in  the  same  way  as  a  mortgage  for  ten  thousand  dollars 
on  a  house.  The  only  bidder  at  the  foreclosure  sale  of  a  house 
is  usually  the  owner  of  the  mortgage.  Whether  he  bids  one 
thousand  dollars  or  ten  thousand  dollars,  the  amount  of  cash 
which  he  has  to  pay  is  nearly  the  same :  enough  to  cover  the 
expenses  of  the  sale.  The  rest  of  the  purchase  price  he  pays  by 
crediting  the  amount  of  it  as  a  payment  upon  the  mortgage  bond. 
The  bondholders,  when  their  mortgage  is  about  to  be  foreclosed, 
endeavor  to  get  themselves  into  the  position  of  the  owner  of  the 


142       FORECLOSURE   OF   RAILROAD   MORTGAGES 

mortgage  on  the  house,  a  position  where  they  can  act  as  one 
man.  They  deposit  their  bonds  with  a  committee  under  an 
agreement  authorizing  the  committee,  among  other  things,  to 
form  a  plan  of  reorganization  and  to  purchase  the  property  at 
foreclosure  before  or  after  the  plan  has  been  formed  or  approved. 
Before  the  sale  a  plan  has  been  usually  agreed  upon  with  com- 
mittees representing  general  creditors  and  stockholders,  under 
which  a  reorganization  committee,  composed  of  representatives 
of  all  classes  of  creditors  and  stockholders,  holds  at  the  time  of 
the  sale  a  great  majority  of  the  bonds  and  outstanding  claims 
and  stock.  If  the  committee  represents  all  of  the  bonds  it  is 
able  to  bid  fifty  million  dollars  as  inexpensively  as  to  bid  one 
million.  If  the  committee  has  only  forty-nine  million  dollars 
of  the  outstanding  fifty  millions,  the  higher  it  bids  the  more 
cash  it  will  have  to  pay  in  order  to  provide  money  to  pay  the 
bondholders  who  have  not  deposited  their  bonds  the  dividend 
to  which  they  are  entitled  as  their  share  of  the  purchase  price. 
Usually  the  amount  of  bonds  held  by  the  committee  is  so  large 
in  proportion  to  undeposited  bonds  that  no  attempt  is  made  by 
the  holders  of  the  latter  to  bid  up  the  price  at  the  sale  and  the 
committee  gets  the  property  at  what  it  chooses  to  bid ;  the  court 
endeavoring  to  secure  the  holders  of  undeposited  bonds  a 
reasonable  payment  by  fixing  an  upset  price.  If,  at  the  sale, 
no  one  bids  this  price,  the  fact  is  brought  to  the  attention  of 
the  court  which  then  lowers  the  upset  price  for  the  next  sale. 

So  far,  therefore,  as  the  railroad  company  and  its  bondholders 
and  general  creditors  and  stockholders  ordinarily  are  concerned, 
it  is  of  no  real  importance  that  a  theoretically  perfect  decree  of 
sale  should  be  made.  The  railroad  company  is  an  empty  shell ; 
its  bondholders,  creditors  and  stockholders  are  going  to  be  the 
purchasers  and  to  be,  with  such  people  as  agree  with  them  to 
put  fresh  money  into  the  property,  the  bondholders  and  stock- 
holders of  the  new  company  which  is  to  own  the  road  after  fore- 
closure sale.  The  important  thing  when  the  parties  in  interest 
are  ready  for  a  decree  is  not  so  much  the  form  of  the  decree  as 


FORECLOSURE   OF   RAILROAD   MORTGAGES       143 

the  speed  with  which  the  property  can  be  transferred  from  the 
possession  of  the  officers  of  the  court  to  the  possession  of  its 
owners.  The  courts  recognize  the  desirability  of  this  change 
and  are  willing  to  hasten  it  by  entering  decrees  which  leave 
many  things  unsettled.  They  have  held,  therefore,  that  it  is 
not  necessary  to  adjust  all  the  disputed  claims  of  original 
parties  and  intervenors  growing  out  of  foreclosure  proceedings 
before  ordering  a  sale.1  All  that  is  "indispensable  in  such  a 
decree"  of  foreclosure  and  sale 

"  is  that  there  should  be  declared  the  fact,  nature  and  extent  of  the 
default  which  constituted  the  breach  of  the  condition  of  the  mortgage 
and  which  justified  the  complainant  in  filing  his  bill  to  foreclose  it  and 
the  amount  due  on  account  thereof  which,  with  any  further  sums 
subsequently  accruing  and  having  become  due  according  to  the  terms 
of  the  security  the  mortgagor  is  required  to  pay  within  a  reasonable 
time  to  be  fixed  by  the  court  and  which  if  not  paid  a  sale  of  the 
mortgaged  premises  is  directed." 2 

The  receiver  and  the  holders  of  debts  due  by  the  receiver  and 
of  preferred  claims  and  liens  of  minor  importance,  the  extent  or 
priority  of  which  the  mortgagee  is  contesting,  are  seldom  con- 
cerned with  the  question  of  whether  decrees  of  sale  are  so  framed 
as  to  bring  the  highest  possible  price ;  for  they  are  otherwise 
satisfactorily  cared  for  by  provisions  in  decrees  varying  accord- 
ing to  circumstances.  Where  the  railroad  is  a  valuable  property, 
everyone  knows  that  claims  entitled  to  priority  of  payment  will 
be  paid  by  the  new  company  as  soon  as  it  gets  possession  and 
they  can  be  adjusted,  and  often  more  speedily  and  inexpen- 
sively than  if  they  were  dealt  with  in  court  proceedings ;  and 
therefore  a  provision  in  the  decree  that  the  purchaser  shall  take 
the  property  subject  to  preferred  debts,  receivers'  certificates, 
allowances  and  the  like  —  with  a  reservation  by  the  court  of  the 

1  Alabama  &  G.  Mfg.  Co.  v.  Robinson,  72  Fed.,  708 ;  1896.  Guaranty  Trust 
Co.  v.  Metropolitan  Street  Ry.  Co.,  168  Fed.,  937 ;  1909 ;  affirmed  on  this  point 
177  Fed.  925;  1910. 

*  Chicago   &  Vincennes  R.  R.  Co.  v.  Fosdick,  106  U.  S.,  47,  at  page  70; 

1882. 


144       FORECLOSURE    OF   RAILROAD   MORTGAGES 

right  to  retake  the  property  if  payment  of  any  claim  is  not 
made  promptly  by  the  purchaser  —  is  all  that  is  really  neces- 
sary for  the  protection  of  such  claims.  On  the  other  hand, 
where  the  railroad  is  a  poor  one,  the  courts  have  found  that 
after  reorganization  it  is  sometimes  soon  back  in  court  with 
preferred  claims  or  even  debts  of  the  old  receivership  unpaid, 
and,  therefore,  when  they  are  doubtful  about  the  future  of  a 
property,  the  courts  try  to  make  the  payment  of  receivership 
debts  and  expenses  and  preferred  claims  certain,  by  providing 
in  the  decree  that  an  amount  which  they  consider  sufficient  to 
meet  all  such  claims  shall  be  paid  in  cash. 

The  courts  now  often  leave  out  provisions  that  used  to  be  in 
decrees  which  rendered  the  purchaser  uneasy,  but  were  of  little 
if  any  practical  benefit  to  anyone;  such,  for  example,  as  the 
requirement  that  the  purchaser  should  not  only  take  subject  to 
all  the  debts  of  the  receiver  and  unpaid  preferred  claims,  but 
should  personally  agree  to  pay  them.  When  no  time  was  fixed 
by  the  decree  within  which  such  claims  had  to  be  presented, 
and  by  the  order  appointing  receivers  all  sorts  of  claims  were 
made  preferential,  the  purchaser  did  not  know  until  the  statute 
of  limitations  had  run  what  his  liabilities  might  be.  The  present 
day  decree  usually  limits  the  claims  to  those  which  have  been 
already  presented  to  the  court,  or  which  shall  be  presented 
within  a  fixed  time ;  and  does  not  require  the  purchaser  to  agree 
to  pay  such  claims,  but  merely  to  take  the  property  subject  to 
their  payment.  Sometimes  when  the  decree  requires  that  the 
purchaser  shall  agree  to  pay  such  claims,  it  provides  that  if  the 
purchaser  assigns  his  bid  to  a  new  company,  the  liability  to  pay 
on  the  part  of  the  bidder  shall  cease  and  shall  attach  to  the 
company. 

In  the  interest  of  the  purchase  at  foreclosure  sale  it  is  now 
always  provided  that  the  purchaser  shall  be  allowed  to  defend 
against  all  unsettled  claims  subject  to  which  he  takes  the 
property  and  shall  have  the  right  to  appeal  from  decrees  allow- 
ing them.  In  the  absence  of  an  express  provision  or  of  some- 


FORECLOSURE   OF   RAILROAD   MORTGAGES       145 

thing  from  which  such  a  right  can  be  implied  the  purchaser  has 
no  such  right.1 

It  is  now  customary  also  to  insert  in  the  decree  clauses,  the 
effect  of  which  is  in  the  language  of  the  court  in  Wabash  Railroad 
Company  v.  Adelbert  College,  208  U.  S.,  38,  53,  1908,  "to  say  to 
any  purchaser  under  it  you  must  take  this  property  subject  to 
all  claims  which  this  court  shall  hereafter  adjudge  to  be  lawful 
and  you  may  be  assured  that  you  will  be  held  to  pay  none  other, 
and  for  the  purpose  of  making  this  statement  good,  the  court 
reserves  jurisdiction  over  the  property  and  claims  in  respect 
to  it.  .  .  ."  The  court  said,  page  55,  that,  except  for  the 
presence  of  such  clauses  in  the  decree  of  foreclosure,  under 
Shields  v.  Coleman,  157  U.  S.,  168,  1895,  the  exclusive  jurisdic- 
tion of  the  federal  court  would  have  terminated  with  the  receiver- 
ship ;  but,  as  it  was,  the  jurisdiction  of  the  federal  court  sur- 
vived and  consequently  a  decree  of  a  state  court  made  in  a 
suit,  —  which  had  been  begun  before  the  suit  in  the  federal 
court,  —  adjudging  a  lien  upon  the  property  which  had  been 
sold  by  the  federal  court,  must  be  reversed.2 

I  shall  end  by  giving  a  rough  draft  of  a  decree : 

1.  —  That  the  mortgage  is  a  valid  lien  upon  the  railroad  and 
other  property  described  in  the  decree ;  that  bonds  to  a  specified 
amount  secured  by  the  mortgage  have  been  duly  executed, 
certified  by  the  trustee  and  issued  and  are  outstanding  in  the 
hands  of  the  public ;  that  default  has  been  made  by  the  defend- 
ant railroad  company  in  the  payment  of  principal  or  interest 
as  the  case  may  be,  and  that  a  specified  amount  is  due  by  the 
railroad  company  to  the  holders  of  the  bonds  and  coupons. 

2.  —  That  the  mortgagor  within  twenty  days,  or  some  other 
fixed  period  after  entry  of  the  decree,  shall  pay  to  the  trustee 
of  the  mortgage  the  amount  found  due  with  interest  from  the 
date  of  the  decree. 

1  Swann  v.  Wright1 8  Executor,  110  U.  S.,  590,  601 ;  1884. 

2  See  also  Julian  v.  Central  Trust  Company,  193  U.  S.,  93 ;  1904. 


146       FORECLOSURE   OF   RAILROAD   MORTGAGES 

3.  —  That  unless  such  payment  is  made  the  special  master 
appointed  by  the  decree  shall  sell  at  public  sale  the  property 
which  is  subject  to  the  lien  of  the  mortgage,  both  that  de- 
scribed in  the  mortgage  and  any  other  property  which  may 
have  been  acquired  during  the  receivership  or  otherwise  and 
which  passes  under  the  mortgage.     In  describing  the  property 
the  decree  uses  broad  words,  such  as  all  the  property  covered 
by  the  mortgage,  and  then  adds  a  full  description. 

4.  —  That  any  purchaser  may  turn  in  as  part  of  the  purchase 
price  bonds  and  coupons  secured  by  the  mortgage  foreclosed 
or  receivers'  certificates  or  other  obligations  payable  ahead  of 
the  bonds  and  coupons,  and  be  credited  with  the  amount  which 
would  be  payable  thereon  if  the  entire  purchase  price  were  paid 
in  cash ;  and  that  the  securities  so  turned  in  shall  be  stamped 
so  as  to  show  payment  thereon  of  the  amount  with  which  the 
purchaser  has  been  credited  and  shall  then  be  returned  to  the 
purchaser  unless  the  amount  of  the  payment  is  equal  to  the  full 
amount  due  thereon. 

5.  —  That  the  proceeds  of  the  sale  of  the  property  shall  be 
applied : 

(a)  to  the  payment  of  the  costs  of  the  complainant,  the  receivers 
and  the  trustee  and  their  respective  counsel,  and  their  charges  and 
allowances ; 

(6)  to  the  payment  of  receivers'  certificates  and  the  debts  of  the 
receivership  generally ; 

(c)  to  the  payment  of  amounts  due  to  creditors  entitled  to  a  prefer- 
ence; 

(d)  to  the  payment  of  the  bonds,  principal  and  interest,  or  if  the 
proceeds  shall  be  insufficient  for  full  payment,  to  the  payment  thereof 
ratably  as  far  as  the  proceeds  will  go. 

This  last  provision  is  varied  to  fit  the  terms  of  the  mortgage. 
Sometimes  coupons  which  were  due  before  the  foreclosure  suit 
was  begun  are  directed  to  be  paid  in  full. 

If  the  decree  is  solely  in  the  foreclosure  suit  it  usually  pro- 
vides that  any  surplus  shall  be  held  subject  to  the  further  order 


FORECLOSURE    OF   RAILROAD   MORTGAGES        147 

of  the  court.  If  the  decree  is  a  decree  both  in  the  foreclosure 
suit  and  the  creditor's  suit  it  either  reserves  the  disposition  of 
the  surplus  for  a  further  decree,  or  it  directs  that  the  surplus 
together  with  the  proceeds  of  any  unmortgaged  property 
directed  to  be  sold,  or  any  other  moneys  or  property  in  the  pos- 
session of  the  receiver  not  covered  by  the  mortgage  shall  be 
applied,  after  paying  an  allowance  to  counsel  for  the  com- 
plainant creditor  and  preferential  claims,  to  the  payment  of 
all  creditors  entitled  to  share  in  the  proceeds  of  unmortgaged 
property,  and  that  the  master,  before  whom  general  creditors 
have  been  directed  to  file  their  claims,  shall  report  to  the  court 
the  amount  of  moneys  so  applicable  and  the  amount  of  claims 
which  are  entitled  to  share  in  such  property. 

The  decree  sometimes  provides  that  an  amount  in  cash  must 
be  paid  by  the  purchaser  sufficient  to  pay  everything  which 
the  decree  requires  to  be  paid  before  the  bonds ;  but  not  always, 
as  those  having  preferential  claims  are  often  satisfied  with  other 
provisions  for  their  payment  which  the  decree  usually  makes 
and  which  appear  later  on. 

6.  —  That  the  purchaser  as  a  condition  of  the  purchase, 
shall  take  subject  to  all  pending  contracts  of,  and  all  indebted- 
ness and  liabilities  incurred  by,  the  receivers,  and  all  allow- 
ances and  expenses  and  preferential  claims  which  shall  not 
be  paid  out  of  the  proceeds  of  sale,  and  shall  save  harm- 
less and  indemnify  the  receivers;  that  in  case  the  pur- 
chaser after  demand  shall  refuse  to  pay  or  discharge  any 
such  obligation  or  perform  any  such  contract  the  person  holding 
the  claim  may,  upon  ten  days'  notice  to  the  purchaser  or  his 
successors  or  assigns,  file  his  petition  to  have  the  claim  enforced 
against  the  property,  that  the  purchaser  or  his  assigns  may 
appear  and  make  defense  to  such  claim,  and  that  either  party 
may  appeal  from  any  decree,  order  or  judgment  made  thereon ; 

That  the  court  retains  jurisdiction  for  the  purpose  of  enforc- 
ing these  provisions ;  and  reserves  the  right  to  retake  and  sell 


148        FORECLOSURE    OF   RAILROAD   MORTGAGES 

the  property  in  case  there  shall  be  a  failure  to  comply  with  any 
order  in  regard  to  the  performance  of  such  a  contract  or  pay- 
ment of  such  a  liability. 

7.  —  That  the  Master  shall  sell  at  a  time  to  be  fixed  by 
him  at  the  request  of  the  solicitor  for  the  trustee  or  after 
consultation  with  the  court  at  a  place  named  in  accordance 
with  Section  1640,  Volume  I  of  the  Compiled  Statutes  of  the 
United  States,  usually  some  railway  station  on   the  line  of 
the  road ;  and  that  the  Master  shall  give  notice  of  such  sale  in 
accordance  with  Section  1642  by  publication  once  a  week  for 
four  weeks  in  such  newspapers  as  are  named  in  the  decree 
including   one  printed,   issued   and   circulating   in   a   county 
where  some  part  of  the  railroad  lies,  the  notice  to  contain  a 
brief  general  description  of  the  property  to  be  sold  and  place 
of  sale  and  a  reference  to  the  decree  for  a  more  particular  de- 
scription.    Power  is  given  to  the  Master  to  adjourn  the  sale  by 
announcement  at  the  time  of  the  sale  upon  consent  of  the  solici- 
tors for  the  complainant  or  with  the  approval  of  the  court. 

The  decree  usually  fixes  an  upset  price. 

8.  —  That  any  party  to  the  cause  or  any  holder  of  the  bonds 
or  receivers'  certificates,  may  purchase  at  the  sale  and  hold  the 
property  in  his  own  right  free  from  any  trust  or  right  of  re- 
demption.    If  the  foreclosure  is  under  one  mortgage  only,  un- 
less there  is  some  very  strong  reason  to  the  contrary,  the  Master 
is  directed  to  sell  the  property  in  one  parcel  as  an  entirety. 
If  the  decree  is  one  for  the  foreclosure  of  several  mortgages,  one 
of  which  is  general,  covering  the  entire  property,  and  two  of 
which  say  are  divisional,  that  is  covering  parts  of  the  property 
only,  the  decree  directs  that  the  property  upon  which  the  divi- 
sional mortgage  A  is  a  lien  shall  be  first  offered  for  sale  and  the 
price  bid  be  noted;    that  the  property  covered  by  divisional 
mortgage  B  shall  next  be  offered  as  a  separate  parcel  and  the 
bid  noted;   that  the  entire  property  shall  then  be  offered  as 


FORECLOSURE   OF   RAILROAD   MORTGAGES        149 

a  whole  and  if  the  price  bid  for  the  entire  property  is  greater 
than  the  total  of  the  prices  bid  for  the  two  parcels  the  bid  for 
the  entire  property  shall  be  accepted,  but  if  the  total  of  the 
amounts  bid  for  the  separate  divisions  is  greater  than  the  price 
bid  for  the  property  as  a  whole,  the  bids  for  the  divisional 
properties  shall  be  accepted ;  and  that  in  case  the  bid  for  the 
entire  property  is  accepted  the  proceeds  are  to  be  deemed 
attributable  to  the  properties  covered  by  the  two  divisional 
mortgages  respectively  in  the  proportions  which  the  bids  for 
those  properties  bear  to  one  another. 

9.  —  That  no  bid  shall  be  received  from  any  bidder  unless 
he  shall  first  deposit  a  certain  sum  in  cash  with  the  Special 
Master  or  a  certified  check  or  receivers'  certificates,  or  bonds 
or  coupons,  to  a  named  amount,  to  be  returned  to  him  if  his  bid 
is  not  accepted;    otherwise  to  be  treated  as  part  payment  of 
the  purchase  price.    The  court  reserves  the  right  to  reject  any 
bid  and  also  to  retake  and  resell  the  property  upon  the  failure  of 
any  purchaser  to  comply  with  the  terms  of  sale. 

10.  —  That  the  receivers  file  with  the  clerk  of  the  court  before 
the  sale  an  inventory  to  include  as  complete  a  list  of  indebted- 
ness, obligations  and  contracts  as  possible,  such  inventory  to 
be  deemed  advisory  and  not  to  constitute  a  warranty;   that 
the  enumeration  in  such  inventory  or  the  decree  of  any  lease 
or  executory  contract  to  which  the  railway  company  is  a  party 
shall  not  be  deemed  an  adoption  of  such  lease  or  contract  by 
the  court  or  by  the  receivers ;  that  at  any  time  after  the  con- 
firmation of  the  sale  and  before  the  delivery  to  the  purchaser 
of  the  property  the  court  will  direct  the  receivers  to  take  such 
action  as  to  adopting  or  not  adopting   such   lease   or   other 
contract  as  the  purchaser  may  request  upon  receiving  proper 
indemnity  from  the  purchaser;   that  any  purchaser  shall  be 
allowed  a  certain  time,  three  months  or  six  months  or  a  year 
from  the  date  of  confirmation,  within  which  to  elect  to  adopt 


150       FORECLOSURE   OF   RAILROAD  MORTGAGES 

or  to  refuse  to  adopt  any  lease  or  other  executory  contract 
which  may  be  included  in  the  properties  sold  and  in  the  event 
of  the  failure  to  file  a  statement  refusing  to  adopt  the  lease  or 
contract  the  purchaser  shall  be  deemed  to  have  elected  to  adopt 
it ;  that  the  court  reserves  the  power  to  direct  the  payment  by 
the  purchaser  or  by  the  receivers  of  such  amounts  as  shall  be 
found  to  be  equitable  upon  an  accounting  or  otherwise  in  re- 
spect of  any  lease  or  traffic  or  trackage  agreement  which  the 
purchaser  shall  elect  not  to  adopt,  and  jurisdiction  is  reserved 
to  enforce  such  payment;  that  the  court  reserves  the  power 
and  jurisdiction  to  deliver  to  a  purchaser  or  purchasers  title  to 
and  possession  of  the  property  and  to  determine  all  controversies 
as  to  the  character,  extent  and  validity  of  the  title  and  posses- 
sion of  such  purchaser  or  purchasers  acquired  through  the 
execution  of  the  decree. 

11.  —  That  upon  confirmation  of  the  sale  and  compliance 
with  the  terms  of  sale  by  the  purchaser,  the  Master  shall  make 
proper  instruments  of  conveyance  and  assignment,  in  which 
the  receivers,  the  railroad  company  and  the  trustee  of  the 
mortgage  and  every  person  holding  the  record  title  for  any 
of  the  property  conveyed  shall  join,  and  shall  deliver  the 
same  to  the  purchaser. 

12.  —  That  the  purchaser  receiving  such  instruments  shall 
be  vested  with  and  shall  hold  possession  of  the  property  and  all 
the  rights  and  franchises  subject  to  the  provisions  of  the  de- 
cree as  fully  and  completely  as  the  mortgagor  or  its  receivers 
at  the  time  of  the  decree  hold  or  enjoy  or  have  theretofore  held 
or  enjoyed  the  same,  and  in  particular  shall  hold  them  freed 
and  discharged  from  the  lien  of  the  mortgage  which  has  been 
foreclosed  and  from  any  claim  of  the  mortgagor,  its  stockholders, 
creditors  and  receivers  and  of  any  party  to  the  cause  and  any 
person  claiming  by,  through  or  under  them,  or  any  of  them, 
except  as  specifically  provided  in  the  decree. 

The   court   finally   reserves   for   further   determination   all 
matters  of  equity  not  expressly  adjudged  in  the  decree  and 


FORECLOSURE    OF   RAILROAD   MORTGAGES        151 

any  party  to  the  cause  is  authorized  to  apply  for  further  order 
and  direction.  The  term  of  the  court  at  which  the  decree  is 
entered  is  sometimes  extended  until  after  the  complete  execu- 
tion of  the  provisions  of  the  decree.1 

After  the  expiration  of  the  time  given  to  the  railroad  com- 
pany to  pay  the  amount  adjudged  due,  the  trustee  files  an 
affidavit  of  non-payment. 

The  notice  of  sale  is  then  published.  The  description  of  all 
real  estate  owned  by  the  company  other  than  the  rights  of  way 
should  be  as  full  as  possible.  The  important  provisions  of  the 
decree  should  also  be  stated  in  the  notice;  and  it  should 
wind  up  with  a  particular  reference  to  the  decree  for  all  further 
details. 

After  the  sale  the  master  makes  a  report  to  the  court.  Where 
the  sale  has  been  made  under  the  decrees  of  several  courts  and 
the  same  master  has  been  appointed  under  all  the  decrees  as 
he  always  is,  his  report  to  the  different  courts  recites  his 
appointment  under  these  different  decrees.  The  report  should 
show  strict  compliance  with  all  the  conditions  of  the  decree 
and  of  the  general  law  necessary  to  the  making  of  a  valid  sale ; 
and  should  state  that  the  purchaser  was  the  highest  bidder; 
that  he  signed  a  memorandum  of  the  sale,  has  complied  with 
all  the  preliminary  terms  and  conditions,  and  is  entitled  to 
a  conveyance  upon  full  payment  as  provided  by  the  decree 
of  sale. 

At  the  time  of  this  report,  the  purchaser  enters  his  appear- 
ance, and  files  his  petition  for  confirmation  of  the  sale.  He 
refers  to  the  report  of  the  master,  and  if  he  is  a  repre- 
sentative of  the  reorganization  committee,  as  he  usually  is,  he 
says  he  is  prepared  to  deliver  to  the  master,  in  order  to  have 
credited  thereon  as  part  of  the  purchase  price  the  dividend 

1  Guaranty  Trust  Company  of  New  York  v.  Metropolitan  Street  Railway,  177 
Fed.  925;  1910. 


152       FORECLOSURE    OF   RAILROAD   MORTGAGES 

applicable  thereto,  bonds,  or  receivers'  certificates,  or  whatever 
it  has  been  provided  by  the  decree  may  be  accepted,  and  he 
offers  in  all  respects  to  comply  with  the  terms  of  his  purchase, 
subject  to  all  the  provisions  in  the  decree  of  sale.  He  prays  for 
leave  to  intervene  and  to  be  made  a  party  to  the  suit,  and  that 
the  report  made  by  the  master  be  approved  and  confirmed. 
The  trustee  moves  also  for  the  confirmation  of  the  report. 
Ordinarily  the  report  of  the  master,  the  petition  of  the  purchaser 
to  intervene  and  the  motion  to  confirm,  are  all  made  at  the 
same  time,  the  various  parties  to  the  suit  waiving  their  right 
to  file  exceptions,  and  consenting  that  the  petition  and  the 
motion  may  come  on  for  hearing  at  once.  On  the  same  day, 
the  decree  of  confirmation  is  made.  This  decree  should  recite 
in  detail  that  all  the  things  have  been  done  or  have  happened, 
which,  by  the  decree  of  foreclosure,  were  precedent  to  the  right 
of  the  master  to  make  the  sale,  and  that  all  things  have  been 
done  subsequent  to  the  sale  to  entitle  the  purchaser  to  a  decree 
of  confirmation. 


THE  REORGANIZATION  OF  CORPORATIONS;  BOND- 
HOLDERS' AND  STOCKHOLDERS'  PROTECTIVE 
COMMITTEES;  REORGANIZATION  COMMITTEES; 
AND  THE  VOLUNTARY  RECAPITALIZATION  OF 
CORPORATIONS 

A  Lecture  Delivered  before  the  Association  of  the  Bar  of  the  City  of  New 
York,  by  Paul  D.  Cravath,  March  1  and  8,  1916. 

THE  late  Adrian  H.  Joline  —  and  no  lawyer  of  his  day  had 
a  more  varied  contact  with  corporate  reorganizations  —  said 
in  one  of  his  Harvard  lectures  delivered  in  1910,  that  after  an 
experience  running  over  a  period  of  thirty  years,  he  found  it 
about  as  difficult  to  tell  how  to  reorganize  a  corporation  as  it 
would  be  for  a  poet  to  tell  how  to  write  poetry.  One  cannot 
formulate  many  rules  or  refer  to  many  precedents  which  will 
serve  as  a  guide  to  the  reorganizer,  for  each  reorganization 
differs  more  or  less  from  all  others.  I  can  therefore  do  little 
more  than  offer  a  series  of  practical  suggestions  based  upon 
experience.  This  should  be  the  most  helpful  method  of  ap- 
'proaching  our  subject,  because  in  few  branches  of  practice  does 
experience  count  for  more  and  there  are  none  in  which  the 
books  furnish  so  little  help. 

I  shall  deal  chiefly  with  the  legal,  rather  than  the  economic 
and  financial  aspects  of  reorganizations,  although  in  a  great 
measure  the  legal  and  business  questions  are  very  closely  inter- 
twined. Usually  it  is  not  the  duty  of  a  lawyer  to  give  advice 
to  his  client  on  economic  questions.  If  you  tell  him  what  he 
may  lawfully  do,  you  may  usually  leave  it  to  him  to  decide 
what  he  may  wisely  do.  But  in  reorganizations,  particularly 
if  your  clients  are  inexperienced  in  reorganization  practice,  it 
is  often  the  duty  of  counsel  to  advise  them  both  as  to  the  prac- 
tical and  legal  aspects  of  the  questions  presented  for  decision. 

153 


154  REORGANIZATION   OF   CORPORATIONS 

A  plan  of  reorganization,  however  lawful,  will  bring  disappoint- 
ment and  discredit  to  its  authors  if  its  terms  are  not  such  as  to 
command  the  support  of  security  holders.  It  is  quite  as  im- 
portant to  propose  a  plan  which  will  be  supported  by  the  se- 
curity holders  as  one  which  will  be  supported  by  the  courts. 
In  both  aspects  it  is  important  that  the  plan  should  be  fair 
and  just,  for  even  after  it  has  been  accepted  by  a  majority  of 
the  security  holders,  the  courts  are  very  apt  to  find  a  way  of 
upsetting  it,  if  it  presents  elements  of  unfairness  or  oppression. 
You  will  get  some  idea  of  the  practical  importance  of  this 
branch  of  professional  activity  when  I  tell  you  that  during  the 
past  twenty-five  years  railroad  corporations  owning  about  one- 
half  of  the  total  mileage  of  the  United  States  have  been  sub- 
jected to  the  process  of  reorganization  or  readjustment  and 
that  over  eighty  railroad  corporations,  owning  about  forty-two 
thousand  miles  of  railroad  or  about  sixteen  per  cent  of  the  total 
mileage  of  the  country,  with  an  aggregate  capitalization  of 
about  two  million  and  a  quarter  dollars,  are  now  in  receivers' 
hands  and  awaiting  reorganization.  In  addition,  a  surprisingly 
large  proportion  of  the  great  industrial  enterprises  of  the 
country,  including  several  which  are  now  enjoying  sensational 
prosperity,  have  passed  through  some  form  of  reorganization. 
United  States  District  Judge  Hough  of  this  District 1  recently' 
estimated  that  fifty  per  cent  of  the  corporations  of  to-day  have 
gone  through  some  form  of  reorganization  in  the  last  twenty 
years. 

Definitions 

The  term  "reorganization,"  as  applied  to  corporations,  may 
somewhat  loosely  be  defined  as  the  rearrangement  of  the 
financial  structure  of  an  incorporated  enterprise,  rendered  neces- 
sary by  insolvency  or  by  the  inability  of  the  corporation  to 
secure  the  necessary  funds  for  its  operations  because  of  obstacles 
resulting  from  its  financial  structure.  Corporate  reorganiza- 

1  Southern  District  of  N.  Y. 


REORGANIZATION   OF   CORPORATIONS  155 

tions  usually,  though  not  always,  follow,  and  are  based  upon, 
the  foreclosure  of  mortgages  or  the  enforcement  of  the  rights 
of  creditors  in  some  form. 

Reorganizations  of  corporations  which  are  insolvent  or  suf- 
fering from  a  defective  financial  structure  are  sometimes  ac- 
complished by  the  voluntary  action  of  the  security  holders. 
It  is  to  such  operations  that  the  term  "readjustment"  is  usually 
applied,  although  in  some  measure  the  terms  "reorganization" 
and  "readjustment"  are  used  interchangeably.  A  recent  illus- 
tration of  the  common  use  of  the  terms  is  furnished  by  the 
Plan  for  the  Readjustment  of  the  Capital  and  Debt  of  The 
Missouri  Pacific  Railway  Company,  which  was  first  offered  for 
the  voluntary  acceptance  of  the  security  holders  in  the  hope 
that  their  acceptance  of  the  Plan  would  render  the  foreclosure 
of  mortgages  unnecessary.  It  was  then  spoken  of  as  a  "Plan 
of  Readjustment."  It  was  not  accepted  by  the  security  holders 
with  sufficient  promptness  to  avert  a  default  in  the  interest 
payments  under  various  mortgages,  upon  which  the  trustees 
thereupon  instituted  foreclosure  proceedings.  The  same  Plan, 
although  not  changed,  automatically  came  to  be  called  a 
"Plan  of  Reorganization"  instead  of  a  "Plan  of  Readjust- 
ment." 

There  are  cases  where,  without  the  spur  of  insolvency  or 
financial  necessity  of  any  kind,  corporations  are,  to  use  a  com- 
mon expression,  "recapitalized,"  that  is,  their  corporate  or 
financial  structure  is  changed  for  some  reason  other  than  to 
meet  financial  stress,  as,  for  instance,  to  increase  or  decrease 
the  amount  of  stock  outstanding,  to  replace  bonds  by  stock  or 
vice  versa. 

Our  subject  therefore  naturally  divides  itself  into  three 
divisions : 

First:  Reorganizations  based  on  the  foreclosure  of  mort- 
gages or  the  enforcement  of  other  rights  of  creditors  and  in- 
volving the  organization  of  a  new  corporation  to  acquire  the 
property  which  is  the  subject  of  the  reorganization ; 


156  REORGANIZATION   OF   CORPORATIONS 

Second:  Readjustments  of  the  debt  or  share  capital  of  cor- 
porations because  of  insolvency  or  financial  needs  of  some  sort 
where  the  property  is  not  transferred  to  a  new  corporation ; 

Third:  The  recapitalization  of  corporations  for  some  other 
purpose  than  to  meet  insolvency  or  correct  defects  of  financial 
structure  and  which  may  be  accomplished  either  with  or  with- 
out the  transfer  of  the  property  to  a  new  corporation. 

REORGANIZATIONS  BASED  ON  THE  FORECLOSURE  OF 
MORTGAGES  OR  THE  ENFORCEMENT  OF  OTHER  RIGHTS 
OF  CREDITORS  AND  INVOLVING  THE  ORGANIZATION  OF 
A  NEW  CORPORATION  TO  ACQUIRE  THE  PROPERTY 
WHICH  is  THE  SUBJECT  OF  THE  REORGANIZATION 

I  shall  deal  chiefly  with  reorganizations  based  upon  defaults 
under,  and  the  foreclosure  of,  mortgages.  By  far  the  greater 
number  of  reorganizations,  and  almost  all  railroad  reorganiza- 
tions, come  under  this  head. 

In  order  to  make  our  discussion  more  definite  and  concrete, 
let  us  assume  that*  you  are  dealing  with  an  insolvent  railroad 
corporation  which  has  several  bond  issues,  each  secured  by 
mortgage,  issues  of  preferred  and  common  stock,  and  a  sub- 
stantial floating  debt  in  addition  to  its  ordinary  current  operat- 
ing debt  for  wages,  supplies  and  the  like.  We  shall  assume 
that  this  railroad  company  is  about  to  default  in  the  payment 
of  interest  upon  one  of  its  mortgages  and  that  you  are  con- 
sulted by  the  banker  by  whom  the  bonds  secured  by  that 
mortgage  were  issued  and  who  therefore  has  an  interest  in  see- 
ing that  proper  steps  are  taken  to  protect  those  bonds.  In 
practice  this  is  the  way  in  which  a  reorganization  usually 
starts.  We  will  assume  that  it  is  recognized  that  the  railroad 
company  can  no  longer  pay  the  interest  upon  its  bonds  and 
that  a  default  under,  and  the  foreclosure  of,  the  mortgage  is 
deemed  inevitable. 


REORGANIZATION   OF   CORPORATIONS  157 

The  Appointment  of  Receivers 

The  first  step  is  to  bring  about  the  appointment  of  a  receiver 
or  receivers  with  sufficient  power  to  protect,  and  continue  the 
operation  of,  the  property  pending  foreclosure  and  reorganiza- 
tion. I  say  "pending  reorganization"  because,  as  was  said  by 
Chief  Justice  Waite  in  Canada  Southern  Railway  Company  v. 
Gebhard,1 

"It  rarely  happens  in  the  United  States  that  foreclosures  of  railway 
mortgages  are  anything  else  than  the  machinery  by  which  arrange- 
ments between  the  creditors  and  other  parties  in  interest  are  carried 
into  effect,  and  a  reorganization  of  the  affairs  of  the  corporation  under 
a  new  name  brought  about." 

It  rarely  is  safe  to  delay  the  application  for  the  appointment 
of  receivers  until  a  foreclosure  bill,  based  upon  a  default  under 
the  mortgage,  can  be  filed,  for  when  it  becomes  notorious  that 
a  corporation  is  nearing  insolvency  and  that  a  default  in  the 
payment  of  its  fixed  charges  is  imminent,  it  is  difficult  to  obtain 
the  necessary  credit  to  enable  it  to  continue  its  operations. 
There  is  also  the  danger  of  attack  by  creditors  either  by  attach- 
ment or  by  unfriendly  receivership  proceedings.  The  experi- 
enced reorganizer  stands  in  special  dread  of  an  unfriendly 
receivership  proceeding  which  may  force  the  property  into  the 
hands  of  a  receiver  who  is  incompetent  or  who  is  under  the 
direction  of  a  court  lacking  the  necessary  powers  effectively 
to  administer  a  property  running  through  several  States.  The 
special  danger  from  this  direction  lies  in  the  fact  that  the  law 
is  well  settled  that  the  court  in  which  the  first  receivership  bill 
is  filed  is  entitled  to  appoint  the  receiver,  assuming  that  the 
allegations  of  the  bill  are  sufficient  to  support  the  appointment.2 

Mr.  Byrne  has  stated  in  his  lecture  the  reasons  why  a  receiver- 
ship in  the  Federal  Courts  is  preferred  to  one  in  the  State 
Courts  and  has  outlined  the  procedure  in  receivership  proceed- 

1  109  U.  S.  539 ;    1883. 

1  Farmers'  Loan  and  Trust  Co.  v.  Lake  Street  Elevated  R.  R.,  177  U.  S.  51 ; 
1900. 


158  REORGANIZATION   OF   CORPORATIONS 

ings  in  the  Federal  Courts.  He  has  also  told  you  the  methods 
ordinarily  adopted  in  order  to  have  receivers  appointed  as 
speedily  as  possible  in  all  jurisdictions  in  which  property  of 
the  corporation  is  situated.  I  wish  to  emphasize  what  he  has 
said  in  regard  to  your  right  deliberately  to  select,  as  the 
creditor  who  is  to  file  the  bill,  one  whose  citizenship  is  such 
that  he  can  go  into  the  Federal  Court  for  the  express  purpose 
of  securing  a  receivership  in  that  court  rather  than  in  the 
State  Court,  and  your  right  to  arrange  that  the  creditor's  bill 
should  be  submitted  to  counsel  for  the  corporation  and  that 
all  the  procedure  should  be  agreed  to  in  advance. 

Only  last  month,  the  United  States  Circuit  Court  of  Appeals 
of  this  Circuit  expressly  approved  the  action  of  the  Board  of 
Directors  of  a  large  industrial  corporation,  organized  under  the 
laws  of  New  Jersey,  in  filing  an  answer  admitting  the  allega- 
tions of  a  creditor's  bill  brought  in  this  District  and  joining  in 
the  prayer  for  the  appointment  of  a  receiver,  where  it  clearly 
appeared  that  the  creditor  had  been  requested  to  file  a  bill 
and  that  it  had  been  filed  with  the  knowledge  of  the  Company's 
Board  of  Directors  and  counsel  for  the  avowed  purpose  of  secur- 
ing the  prompt  appointment  of  receivers  by  the  Federal  Court.1 

I  have  emphasized  the  so-called  "Consent  Receiverships" 
in  the  Federal  Courts  because,  as  the  result  of  the  appar- 
ently widespread  misapprehension  regarding  them  which  has 
been  current  of  late,  counsel  are  very  apt  to  attempt  to  do  by 
indirect  and  circuitous  methods  what  they  should  do  directly 
and  openly. 

I  refer  you  to  Mr.  Byrne's  lecture  for  a  discussion  of  the  dif- 
ference between  a  chancery  receivership  and  a  statutory  receiver- 
ship and  for  the  procedure  in  respect  of  ancillary  receiverships 
in  the  Federal  Courts.  It  may  be,  as  was  recently  remarked 
by  a  distinguished  New  Jersey  Vice-Chancellor,  that  "the 
jurisdiction  which  the  Federal  Courts  have  thus  worked  out 

1  Guaranty  Trust  Company  of  New  York  v.  International  Steam  Pump  Com- 
pany, 231  Fed.  594  ;  1916. 


REORGANIZATION   OF   CORPORATIONS  159 

...  is  somewhat  extraordinary,"  but  it  is  a  most  effective 
system.  It  possesses  an  elasticity  and  capacity  to  be  molded 
to  meet  emergencies  which  is  not  possible  under  any  system 
regulated  by  statute.  A  system  of  ancillary  receiverships  all 
centering  around  a  primary  receivership  avoids  the  conflict 
and  working  at  cross-purposes  which  are  inevitable  where  the 
administration  of  a  property  is  in  the  hands  of  several  State 
Courts,  and  the  Federal  Courts  have  built  up  a  system  of  prec- 
edents which  guide  the  practitioner  in  meeting  most  of  the 
emergencies  that  arise  in  the  administration  of  complicated 
properties. 

In  the  case  of  industrial  corporations  organized  under  the 
laws  of  New  Jersey,  it  has  recently  been  found  necessary  to 
supplement  a  Federal  Receivership  by  a  receivership  in  the 
State  Courts  under  the  New  Jersey  Corporation  Act.1 

The  Circuit  Court  of  Appeals  for  the  Third  Circuit  has  held 
that  the  proceedings  in  the  Federal  Court  for  the  appointment 
of  receivers  and  the  distribution  of  assets  were  conducted  under 
the  New  Jersey  statutes  and  could  accomplish  all  the  results 
contemplated  by  those  statutes  excepting  the  dissolution  of 
the  corporation.2  This  view,  however,  has  not  been  accepted 
by  the  New  Jersey  Courts.  In  Gallagher  v.  Asphalt  Company 
of  America,3  the  New  Jersey  Court  expressed  the  opinion  that 
the  New  Jersey  Courts  were  the  proper  tribunals  for  the  exer- 
cise of  the  rights  created  by  the  statute.  In  several  recent 
instances  4  where  the  primary  receivers  were  appointed  by  the 
United  States  District  Court  for  the  Southern  District  of  New 
York,  the  New  Jersey  Court  of  Chancery,  upon  the  application 
of  stockholders  made  under  the  New  Jersey  statutes,  appointed 
a  separate  receiver,  who  was,  however,  instructed  not  to  inter- 

1  §§  63,  64  and  65;  Conklin  v.  United  States  Shipbuilding  Co.,  140  Fed.  219 ; 
1905. 

2  Land  Title  &  Trust  Co.  v.  Asphalt  Co.  of  America,  127  Fed.  1 ;  1903. 

3  65  N.  J.  Eq.  258 ;   1903. 

4  E.g.,   International  Steam  Pump  Company  and  International  Mercantile 
Marine  Receiverships. 


160  REORGANIZATION   OF   CORPORATIONS 

fere  with  the  administration  of  the  assets  in  the  possession  of 
the  Federal  Receivers,  but  simply  to  take  possession  of  any 
assets  which  were  not  in  the  possession  of  the  Federal  receivers, 
and  to  stand  ready  to  receive  any  assets  which  might  be  turned 
over  to  him  by  the  Federal  receivers.  I  think  it  may  now  be 
regarded  as  settled  practice  that  where  receivers  of  a  New 
Jersey  corporation  are  appointed  by  the  Federal  Courts  there 
should  be  a  receiver  appointed  by  the  New  Jersey  Court  of 
Chancery  under  the  New  Jersey  statutes  to  represent  the  cor- 
poration and  act  as  the  protector  of  the  rights  of  its  stock- 
holders.1 

It  is  the  usual,  although  not  the  invariable,  practice  in  the 
Federal  Courts,  at  least  in  this  district,  to  appoint  two  receivers, 
one  suggested  by  the  applicant,  frequently  an  officer  of  the  cor- 
poration, and  the  other  an  independent  person  chosen  by  the 
court,  usually  a  lawyer.  The  usual  preference  of  the  court  to 
appoint  at  least  one  person  of  its  own  selection  as  an  inde- 
pendent receiver  is  justified  by  the  very  grave  responsibility 
assumed  by  the  Federal  Court  in  receiverships,  which  makes  it 
proper  that  at  least  one  of  the  receivers  should  be  a  person 
having  the  full  confidence  of  the  Court  and  known  to  the  Court 
to  be  free  from  bias  and  entanglements.  As  has  been  well 
said,  the  Receiver  is  "the  eyes,"  "the  ears/'  and  "the  hands" 
of  the  Court  and  should  be  "absolutely  impartial." 

In  the  case  of  an  insolvent  industrial  corporation,  bank- 
ruptcy has  one  advantage  over  an  equity  receivership,  namely, 
that  the  trustee  in  bankruptcy  receives  title  to  the  property 
wherever  located,  thus  avoiding  the  necessity  of  instituting  an 
ancillary  proceeding  in  every  jurisdiction  in  which  the  corpora- 
tion has  property.  Among  the  disadvantages  of  a  bankruptcy 
proceeding  over  an  equity  receivership  are  the  necessity  of 
strictly  complying  with  statutory  requirements  with  the  result- 
ing inelasticity  of  procedure,  statutory  limitations  upon  the 
power  of  the  bankruptcy  court  to  permit  the  continuation  of 

1  See  Gallagher  v.  Asphalt  Company  of  America,  67  N.  J.  Eq.  441 ;    1904. 


REORGANIZATION   OF  CORPORATIONS  161 

the  business,  and  the  impatience  of  the  bankruptcy  court  to 
secure  an  early  sale  and  distribution.  In  the  case  of  industrial 
corporations  of  large  magnitude,  an  equity  receivership  is  much 
to  be  preferred  to  bankruptcy.  An  equity  receivership  is  no 
insurance  against  bankruptcy  proceedings,  for  it  is  within  the 
power  of  three  creditors  to  force  bankruptcy  on  an  insolvent 
corporation  within  four  months  after  the  act  of  bankruptcy 
which  is  often  involved  in  an  equity  receivership.  Railroad 
companies  are  not  subject  to  bankruptcy  proceedings,  which 
can  be  instituted  by  creditors  only  against  a  "moneyed,  busi- 
ness or  commercial  corporation,  except  a  municipal,  railroad, 
insurance  or  banking  corporation."  1 

The  Foreclosure  of  the  Mortgage 

Having  secured  the  appointment  of  receivers,  your  next 
important  step  would  normally  be  the  foreclosure  of  the  mort- 
gage so  soon  as  a  default  permitting  foreclosure  has  occurred. 
In  that  event  the  receivership  would,  to  use  a  common  expres- 
sion, be  extended  to  the  foreclosure  suit,  which  means  that  the 
persons  who  were  appointed  receivers  upon  the  creditor's  bill 
would  also  be  appointed  receivers  under  the  foreclosure  bill. 

The  primary  foreclosure  suit  should,  in  turn,  be  followed 
promptly  by  the  filing  of  an  ancillary  foreclosure  bill  in  each 
of  the  other  circuits  in  which  there  is  mortgaged  property  and 
in  each  of  those  ancillary  suits  an  order  should  be  entered  ap- 
pointing ancillary  receivers.  I  will  not  follow  the  proceedings 
in  the  foreclosure  suit  because  they  have  been  described  in  Mr. 
Byrne's  lecture. 

It  is  to  the  interest  of  your  committee  that  the  creditor's 
suit  and  the  foreclosure  suit  should  be  confined  to  the  necessary 
parties  and  your  tactics  should  be  directed  to  that  end.  Those 
who  wish  to  harass  you  are  very  apt  to  seek  leave  to  intervene 
in  the  creditor's  suit  or  in  the  foreclosure  suit,  so  that  they  will 

1  Bankruptcy  Act,  §  4. 


162     REORGANIZATION  OF  CORPORATIONS 

become  entitled  to  an  opportunity  to  oppose  all  proceedings. 
Courts  are  more  liberal  in  admitting  intervenors  in  creditors' 
suits  than  in  foreclosure  suits.  Judge  Lacombe  in  the  Metro- 
politan  Street  Railway  receivership  proceedings  adopted  the 
policy  of  admitting  as  parties  to  both  creditors'  and  foreclosure 
suits  the  committees  representing  substantial  holdings  of  securi- 
ties, including  the  stock,  and  of  excluding  all  other  applicants.1 
This  practice  of  admitting  committees  is  not  general.2 

Ordinarily,  bondholders  will  not  be  admitted  as  parties  to  a 
foreclosure  suit  instituted  by  their  trustee,  but  in  the  recent 
Rock  Island  case,3  the  Circuit  Court  of  Appeals  of  this  Circuit  4 
admitted  a  minority  bondholders'  committee  upon  the  theory 
that  the  attitude  of  the  Trust  Company,  which,  as  trustee  of 
the  mortgage,  was  complainant  in  the  foreclosure  suit,  was 
"ambiguous,"  it  having  appeared  that  its  President  was  also 
Chairman  of  the  majority  bondholders'  committee  with  which 
the  minority  bondholders'  committee  was  at  odds.  This  deci- 
sion raises  a  question  as  to  the  wisdom  of  the  practice,  which 
has  heretofore  been  common,  of  appointing  an  officer  of  the 
trust  company  which  is  trustee  of  the  mortgage,  a  member  of 
the  committee  to  represent  bonds  secured  by  the  mortgage. 

The  Protective  Committee  and  the  Deposit  Agreement 

While  you  have  been  preparing  the  receivership  papers,  it 
may  be  assumed  that  your  client,  the  banker,  has  been  engaged 
in  forming  a  bondholders'  protective  committee,  in  which  event 
it  becomes  part  of  your  task  to  draw  the  Bondholders'  Protec- 
tive Agreement  appointing  the  committee,  defining  its  powers 
and  providing  for  the  deposits  of  bonds  thereunder.  The  terms 
of  such  an  agreement,  of  course,  vary  with  circumstances,  but 
its  primary  purpose  is  to  confer  upon  the  committee  the  power 

1  Pennsylvania  Steel  Co.  v.  New  York  City  Ry.  Co.,  160  Fed.  222 ;    1908. 

2  Metropolitan  Street  Railways  case,  181  Fed.  285 ;    1910. 

3  Central  Trust  Co.  v.  Chicago  R.  I.  &  P.  R.  Co.,  218  Fed.  336 ;  1914. 

4  Second  Circuit. 


REORGANIZATION   OF   CORPORATIONS  163 

to  take  any  action  it  may  deem  necessary  or  proper  for  the 
protection  of  the  bondholders  and  the  enforcement  of  their 
rights  in  the  foreclosure  proceedings  or  in  any  other  proceedings 
affecting  the  mortgaged  property.  The  powers  conferred  in 
this  regard  cannot  well  be  too  broad.  The  purpose  of  the  agree- 
ment should  be  to  place  the  committee  practically  in  the  posi- 
tion of  owners  of  the  bonds,  with  power  to  exercise  all  the  rights 
and  pursue  all  the  remedies  conferred  by  the  mortgage.  Under 
modern  mortgages,  the  action  of  the  trustee  is  usually  placed, 
subject  to  certain  limitations,  under  the  control  of  the  holders 
of  a  designated  proportion  of  the  bonds,  and  it  is  important 
that  the  protective  committee  should,  so  soon  as  practicable, 
have  on  deposit  at  least  the  proportion  of  the  bonds  in  which 
that  control  is  vested. 

The  usual  parties  to  the  agreement  are  the  bondholders' 
committee  and  the  depositing  bondholders,  or  rather,  the 
holders  of  the  certificates  of  deposit  issued  by  the  depositary 
appointed  by  the  Committee  to  receive  deposits  of  bonds, 
usually  a  trust  company.  It  is  not  usual  to  require  bondholders 
to  sign  the  agreement,  but  machinery  is  provided  whereby  the 
bondholder  automatically  becomes  a  party  by  depositing  his 
bonds  and  accepting  a  certificate  of  deposit  issued  by  the  de- 
positary. These  certificates  of  deposit  may  be  transferable  on 
transfer  books  kept  by  the  depositary,  or  they  may  be  in 
bearer  form  and  transferable  by  mere  delivery. 

If  the  bonds  are  listed  on  the  New  York  Stock  Exchange, 
the  certificates  of  deposit  should  be  engraved  or  printed  on 
engraved  forms  which  most  Trust  Companies  have  on  hand. 
So  soon  as  a  substantial  amount  of  bonds  have  been  deposited, 
the  certificates  of  deposit  should  be  listed,  for  listing  increases 
their  availability  as  collateral  for  loans  and  therefore  encourages 
deposits.  If  listing  is  contemplated,  a  registrar  for  the  certifi- 
cates of  deposit  must  be  appointed. 

Certificates  of  deposit  representing  securities  deposited  under 
a  protective  agreement  are  frequently  referred  to  as  "nego- 


164     REORGANIZATION  OF  CORPORATIONS 

tiable."  The  term,  however,  is  used  loosely  as  meaning  trans- 
ferable by  delivery,  for  such  a  certificate  is  not  a  negotiable 
instrument  in  a  technical  sense.  I  shall  not  take  time  to  dis- 
cuss the  interesting  question  as  to  how  far  the  qualities  of 
negotiability  may  be  conferred  by  agreement  in  respect  of  an 
instrument  which  does  not  meet  the  definition  of  a  negotiable 
instrument.1 

The  contract  resulting  from  the  deposit  of  securities  under  a 
deposit  agreement  is  rather  a  peculiar  one.  It  imposes  no 
affirmative  liability  on  the  depositor.  He  ceases  to  be  a  party 
to  the  agreement  the  moment  he  transfers  his  certificate  to  an- 
other. It  is  practically  an  agreement  in  rem  which  follows  the 
certificate  into  the  hands  of  any  holder.  If  the  certificates  are 
payable  to  bearer,  there  is  no  way  of  identifying  the  holders  at 
a  particular  time.  Effective  notice  to  them  can  be  given  only 
by  publication  in  the  manner  prescribed  in  the  agreement.  In 
case  of  default  by  the  depositor  in  meeting  the  conditions  of 
deposit,  there  is  no  remedy  against  him  individually,  but  the 
remedy  is  by  forfeiture  or  sale  of  the  property  represented  by 
his  certificate.  The  provisions  of  the  agreement  in  this  regard 
must  therefore  be  clear  and  precise.  The  records  of  any  action 
taken  for  the  forfeiture  or  sale  should  be  carefully  preserved 
because  the  certificate  holder  may  turn  up  to  assert  his  rights 
years  after  the  event. 

I  will  not  attempt  to  indicate  in  any  detail  what  should  be 
the  provisions  of  a  protective  agreement,  whether  it  be  for 
bonds  or  unsecured  obligations  or  stock,  but  I  will  tell  how 
you  may  simplify  your  task  in  preparing  such  an  agreement  if 
you  pursue  the  course  most  lawyers  do.  Do  not  attempt  to 
evolve  the  agreement  out  of  your  own  consciousness,  for  it 
would  take  you  days  to  work  out  clauses  covering  half  of  the 
contingencies  for  which  provision  should  be  made.  If  you 

1  See  In  re  Goy  &  Co.,  Limited  (1900),  2  Ch.  149;  In  re  Brown  &  Gregory, 
Limited  (1904),  1  Ch.  627 ;  Goodwin  v.  Roberts  (1876),  1  App.  Gas.  476  ;  France 
v.  Clarke  (1884),  26  Ch.  Div.  257  ;  Evertson  v.  Bank,  66  N.  Y.  14,  19  ;  1876. 


REORGANIZATION   OF   CORPORATIONS  165 

have  not  a  model  for  such  an  agreement  in  your  own  office, 
go  to  some  friend,  a  lawyer  or  banker  or  broker,  and  get  from 
him  a  copy  of  the  deposit  agreement  used  in  some  previous 
transaction  of  such  magnitude  and  dignity  that  the  agreement 
must  have  been  the  workmanship  of  some  experienced  and 
competent  counsel.  You  can,  without  much  difficulty,  find  a 
model  which,  with  some  change,  will  fit  almost  any  situation. 
It  is  then  a  comparatively  simple  task  to  eliminate  the  provi- 
sions which  are  inapplicable  to  your  situation  and  to  add  the 
provisions  required  by  its  special  circumstances. 

I  do  not  intend  to  give  you  the  impression  that  the  greatest 
care  is  not  required  in  the  preparation  of  such  an  agreement, 
for  few  instruments  call  for  greater  care  or  more  painstaking 
attention  to  detail.  It  is  your  Committee's  grant  of  power  and 
it  should  be  broad  enough  to  cover  every  emergency  with  which 
the  Committee  is  likely  to  have  to  deal.  There  will  be  no  oppor- 
tunity to  correct  mistakes,  because  there  will  be  as  many  parties 
to  the  agreement  as  there  are  holders  of  certificates  of  deposit 
—  there  may  be  thousands  of  them  —  and  the  agreement  can- 
not be  changed  without  the  consent  of  each. 

There  are  a  few  comments  applicable  to  protective  agree- 
ments under  almost  all  circumstances.  In  the  first  place,  do 
not  place  too  great  reliance  upon  the  effectiveness  of  the  general 
clauses  which  appear  in  most  deposit  agreements  and  which 
purport  to  give  the  Committee  power  to  do  almost  anything 
it  chooses.  So  far  as  possible,  have  a  specific  grant  of  power 
for  everything  the  Committee  is  likely  to  be  required  to  do, 
remembering  that  your  Committeejs  a  trustee  for  its  depositors 
and  that  the  agreement  may  be  strictly  construed  against  it. 
In  United  Water  Works  Company,  Limited,  v.  The  Omaha  Water 
Company,1  a  bondholders'  committee  had  been  appointed  under 
an  agreement  which  described  a  very  simple  plan  of  reorgani- 
zation and  provided  that  in  case  the  Committee  purchased  the 
property  at  foreclosure  sale  it  should 

1  164  N.  Y.  41 ;   1900. 


166  REORGANIZATION   OF   CORPORATIONS 

"prior  to  the  conveyance  of  any  purchased  property  to  the  new  com- 
pany, submit  to  the  certificate  holders  a  detailed  plan  of  reorganiza- 
tion, which  shall  be  binding  upon  all  said  holders,  unless  the  holders 
of  a  majority  in  interest  of  the  outstanding  certificates  shall,  within 
thirty  days,  file  with  the  Trust  Company  their  written  dissent  from 
said  plan." 

The  agreement  then  provided  that 

"The  Committee  may  supply  any  defects  or  omissions  in  this  plan 
which  it  shall  deem  necessary  to  be  supplied  to  enable  the  Committee 
to  carry  out  the  general  purposes  of  the  plan ;  and  with  the  consent 
of  the  holders  of  a  majority  in  interest  of  the  outstanding  certificates, 
may  take  any  action  other  than  is  provided  for  in  this  plan  which  the 
Committee  shall  unanimously  determine  to  be  for  the  benefit  ratably 
of  all  of  the  certificate  holders." 

The  Committee,  having  purchased  the  property,  submitted  a 
detailed  Plan  of  Reorganization  which  differed  from  the  original 
Plan  in  that  it  allotted  a  certain  interest  in  the  new  company 
to  stockholders  and  created  a  voting  trust.  The  Court  of 
Appeals  held  that  because  of  this  departure  the  failure  of  a 
majority  to  dissent  from  the  modified  Plan  within  thirty  days 
did  not  result  in  the  adoption  of  the  detailed  Plan.  In 
other  words,  the  provisions  of  the  original  agreement  creat- 
ing the  machinery  for  the  modification  of  the  Plan  applied 
only  to  modifications  which  were  consistent  with  the  original 
Plan. 

Another  excellent  illustration  of  the  danger  of  relying  upon 
the  broad  clauses  giving  general  grants  of  power  is  furnished 
by  the  recent  decision  of  Judge  Mayer  of  this  District 1  in 
Titus  v.  United  States  Smelting,  Refining  and  Mining  Explora- 
tion Company.2  In  that  case  a  bondholders'  protective  agree- 
ment, after  providing  that  the  committee  could  do  certain 
things,  provided  that  the  money  and  securities  in  its  hands 
might  be  used  "for  such  other  purposes  as  the  committee  in 
its  uncontrolled  discretion  may  determine."  The  Court  held 

1  Southern  District  of  N.  Y.  *  Not  yet  reported. 


REORGANIZATION   OF   CORPORATIONS  167 

that  this  grant  of  power,  although  apparently  unlimited,  must 
be  controlled  by  the  manifest  purposes  of  the  agreement  and 
that  a  contract  by  which  the  committee  turned  over  the  property 
to  a  stranger  for  exploration  and  development  was  beyond  its 
power,  because  the  protective  agreement  did  not  authorize  the 
committee  thus  to  surrender  its  discretion. 

The  Protective  Agreement  should  provide  that  the  Com- 
mittee shall  have  power  to  add  to  its  number,  to  accept  resig- 
nations of  its  members  and  to  fill  vacancies.  There  should 
be  express  provision  authorizing  the  Committee  to  act  by  a 
majority  and  permitting  members  to  vote  by  proxy,  and  suit- 
able provisions  for  protecting  the  Committee  and  Depositary 
against  mistakes.  The  Committee  should  have  the  power  to 
employ  accountants,  engineers,  counsel  and  other  experts, 
arrange  for  their  compensation  and  for  other  expenses  and  hold 
or  pledge  the  deposited  securities  as  security  therefor.  The 
agreement  usually  provides  that  the  Committee's  decision  as 
to  its  own  compensation,  as  well  as  its  expenses,  shall  be  bind- 
ing upon  the  depositors.  There  is  no  doubt  that  this  provision 
is  effective  so  far  as  the  Committee's  expenses,  incurred  by  it 
in  good  faith,  are  concerned,  but  it  is  questionable  whether  any 
provision  in  an  agreement  appointing  trustees  can  make  them 
the  final  arbiters  of  their  own  compensation. 

It  is  therefore  advisable  that  provision  should  be  made  by 
which  the  Committee's  compensation  may  ultimately  be  fixed 
by  agreement  or  by  the  exercise  of  some  independent  judgment. 
A  protective  agreement  usually  fixes  a  maximum  limit  to  the 
Committee's  compensation  and  expenses.  In  the  case  of  re- 
organization agreements  the  usual  method  of  meeting  the  prob- 
lem is  to  provide  that  the  approval  of  the  Committee's  com- 
pensation by  the  board  of  directors  of  the  reorganized  company 
shall  be  conclusive.  Such  a  provision  is  doubtless  effective 
unless  the  board  of  directors  is  so  made  up  as  to  be  under  the 
domination  or  influence  of  the  committee.  It  is  often  provided 
that  a  statement  of  the  Committee's  compensation  and  expenses 


168  REORGANIZATION   OF   CORPORATIONS 

shall  be  filed  with  the  depositary  and  shall  be  deemed  approved 
by  all  depositors  unless  objections  are  made  within  a  specified 
period. 

A  protective  agreement  usually  confers  upon  the  Committee 
power  to  adopt  a  plan  of  reorganization  of  its  own  devising  or 
one  prepared  by  some  one  else.  It  is  not  usual  to  give  a  pro- 
tective committee  power  to  adopt  a  plan  without  first  sub- 
mitting it  to  the  depositors.  The  common  provision  is  to 
require  that  any  Plan  and  Agreement  shall  be  lodged  with  the 
depositary  subject  to  examination  by  all  depositors  and  that 
a  notice  of  the  filing  of  the  Plan,  but  not  describing  it,  be  pub- 
lished at  stated  intervals  for  a  specified  period.  Usually  the 
agreement  provides  that  depositors  who  are  dissatisfied  with 
the  Plan  may,  within  a  designated  period,  say  thirty  days 
after  the  first  publication  of  the  notice,  withdraw  their  securi- 
ties upon  surrender  of  their  certificates  of  deposit  and  making 
a  contribution,  at  some  specified  rate,  toward  the  expenses 
and  compensation  of  the  Committee.  Under  such  a  notice 
the  holders  of  certificates  of  deposit  who  do  not  withdraw 
their  securities  within  the  specified  period  automatically  be- 
come bound  by,  and  parties  to,  the  Plan  and  Agreement  of 
Reorganization. 

Protective  agreements  sometimes  provide  that  the  Plan  of 
Reorganization  shall  become  binding  upon  all  depositors  if 
within  a  specified  period  after  publication  of  the  notice  of  the 
filing  of  the  Plan  the  holders  of  a  specified  proportion  of  the 
deposited  securities  do  not  file  with  the  depositary  notice  of 
their  dissent  from  the  Plan.  In  this  case,  the  dissatisfied 
minority  may  be  bound  by  the  failure  of  the  satisfied  majority 
to  dissent  from  the  Plan. 

In  order  to  insure  that  depositors  shall  not  have  the  right 
to  withdraw  securities  until  after  the  announcement  of  a  Plan 
of  Reorganization,  the  agreement  should  expressly  so  provide 
and  should  show  also  some  consideration  running  to  the  de- 
positors, such,  for  instance,  as  covenants  on  the  part  of  the 


REORGANIZATION  OF  CORPORATIONS     Io9 

Committee  to  endeavor  to  protect  the  interests  of  the  depositors 
and  to  formulate  a  Flan  of  Reorganization.  In  the  case  of 
Colonial  Tnot  Co.  v.  Wallace,1  the  United  States  Circuit  Court 
of  Appeals  i  or  this  Circuit  *  held  that  under  the  form  of  deposit 
agreement  then  usually  used  which  gave  depositors  the  right 
of  withdrawal  within  a  certain  period  after  the  announcement 
of  a  Plan  of  Reorganization,  the  right  of  withdrawal  accrued 
immediately  upon  deposit  and  was  not  dependent  upon  the 
announcement  of  a  Flan. 

In  view  of  the  decision  of  our  Court  of  Appeals  in  Industrial 
A  Trust  Co.,  Ltd.  v.  Tod*  the  agreement  should  expressly  pro- 
vide that  a  Han  of  Reorganization  may  be  proposed  after,  as 
well  as  before,  a  foreclosure  sale  of  the  property. 

Tliis  very  interesting  decision  affects  many  questions  in- 
volved in  the  preparation,  construction  and  enforcement  of 
and  Tf*fiTpaniTHM"i^m  agreements.  In  that  c  asff  a 


bondholders'  committee  was  created  under  a  deposit  agreement 
winch,  in  the  language  of  Judge  Vann's  opinion,  "conferred 
almost  unlimited  powers  upon  them."  Tne  agreement  specif- 
ically authorized  the  Committee  to  purchase  the  railroad  at 
foreclosure  sale  and  to  use  the  bonds  in  payment  of  the  pur- 
chase price.  It  also  authorized  the  Committee  to  prepare  a 
Flan  of  Reorganization,  but  did  not  specifically  provide  whether 
this  should  be  before  or  after  the  purchase  of  the  property. 
Hie  agreement  contained  the  usual  provisions  for  giving  notice 
of  the  filing  of  the  Han  and  affording  to  dissatisfied  bondholders 
an  opportunity  to  withdraw.  The  Committee  purchased  the 
railroad  at  the  foreclosure  sale,  paid  for  it  by  the  use  of  the 
deposited  securities  and  subsequently  prepared,  filed  and  an- 
nounced a  Man  of  Reorganization.  Tne  Industrial  &  General 
Trust  Company,  a  depositor  of  bonds,  although  it  did  not 
exercise  the  privilege  of  withdrawal,  protested  against  the  Flan 
of  Reorganization  and  brought  suit  against  the  Committee  for 
conversion.  The  Court  of  Appeals  held  that  a  suit  for  con- 

1  183  FfaL  887;  1910.          *  Second  Grant.  *  180  N.  T.  315;  19Ox 


170  REORGANIZATION   OF   CORPORATIONS 

version  did  not  lie,1  whereupon  the  complaint  was  amended  to 
a  cause  of  action  for  breach  of  contract.  The  Court  below  dis- 
missed the  complaint.  Its  judgment  was  affirmed  by  the 
Appellate  Division  but  reversed  by  the  Court  of  Appeals, 
Judge  Vann  writing  the  prevailing  opinion  and  Judge  Gray  the 
dissenting  opinion,  in  which  Judge  O'Brien  concurred.  In  the 
prevailing  opinion  the  Court  reached  the  following  instructive 
conclusions :  (p.  225) 

1.  That  "as  the  reorganization  agreement  was  prepared  by  the 
committee,  and  the  language  used  is  wholly  their  own,  it  should  be 
construed  most  favorably  to  the  bondholders,  who  had  no  part  in 
preparing  it,  but  were  compelled  to  accept  it  as  it  was,  or  not  accept 
it  at  all." 

2.  That  under  the  broad  provisions  of  the  agreement  to  the 
effect  that  the  Committee's  construction  of  its  provisions  should 
be  final,  the  Committee  (p.  226) 

"were  doubtless  protected  from  the  outcome  of  errors  of  judgment 
and  honest  mistakes,  but  good  faith  is  the  standard,  erected  by  the 
law,  by  which  all  their  acts  and  omissions  are  to  be  judged," 

and  that,  therefore,  no  provision,  however  strong,  could  shield 
the  Committee  from  liability  unless  good  faith  is  observed. 

Judge  Gray  in  the  dissenting  opinion  expressed  the  view,  as 
did  the  Appellate  Division,  that  the  provisions  in  question  did 
protect  the  Committee  in  the  action  which  they  had  taken. 

3.  That  while  there  was  no  express  provision  to  the  effect 
that  the  Plan  of  Reorganization  should  be  promulgated  prior 
to  the  acquisition  of  the  property  by  the  Committee  at  fore- 
closure sale,  there  being  no  provision  to  the  contrary,  there  was 
an  implied  obligation  on  the  part  of  the  Committee  to  propose 
the  Plan  of  Reorganization  prior  to  the  sale  in  order  that  dis- 
satisfied bondholders  might  have  an  opportunity  of  withdraw- 
ing their  bonds  and  protecting  themselves  at  the  foreclosure 
sale. 

1  The  Industrial  &  General  Trust  Limited  v.  Tod,  170  N.  Y.,  233  ;   1902. 


REORGANIZATION   OF   CORPORATIONS  171 

The  facts  before  the  Court  seemed  to  make  this  a  hard  case, 
and  the  decision  went  very  far,  but  the  cautions  which  it  gives 
to  draftsmen  of  protective  and  reorganization  agreements  are 
too  striking  to  require  comment. 

In  practice,  members  of  a  committee  are  frequently  owners 
of  securities  of  the  issue  which  it  is  their  duty  to  protect  and 
they  may  wish  to  be  free  to  purchase  further  securities  of  the 
same  issue  as  well  as  certificates  of  deposit  issued  by  the  Deposi- 
tary. The  agreement  should  expressly  authorize  such  trans- 
actions. It  should  also  authorize  the  members  of  the  Com- 
mittee to  form,  or  take  part  in,  syndicates  for  underwriting  the 
cash  requirements  of  the  Plan  or  otherwise  aiding  the  reorgani- 
zation. It  frequently  happens  that  the  same  banking  firm  is 
represented  on  the  Committee,  acts  as  reorganization  managers, 
and  also  forms  and  manages  the  syndicate  to  provide  the  cash 
requirements.  Manifestly  the  provisions  permitting  these 
inter-relationships  must  be  clear,  full  and  explicit. 

The  present  rules  of  the  New  York  Stock  Exchange  require 
that  every  protective  agreement  affecting  listed  securities  shall 
fix  a  date  by  which  depositors  should  be  entitled  either  to  their 
new  securities  or  to  the  return  of  their  old  securities.  It  is 
usual  to  fix  a  date  so  far  ahead,  as,  for  instance,  five  years,  to 
allow  ample  latitude. 

The  bondholders'  protective  committee  having  been  formed 
and  having  executed  the  protective  agreement  and  lodged  it 
with  the  depositary,  the  Committee  should  then  give  notice  of 
its  formation  and  call  for  the  deposit  of  bonds.  The  notice  is 
usually  published  as  an  advertisement  and  also  mailed  to  bond- 
holders in  so  far  as  their  addresses  are  ascertainable.  The 
notice  of  the  formation  of  the  Committee  is  sometimes  published 
in  advance  of  the  actual  preparation  and  execution  of  the  deposit 
agreement,  particularly  if  there  is  fear  that  another  committee 
with  an  ambition  to  represent  the  same  securities  is  in  process 
of  formation.  There  is,  of  course,  a  distinct  advantage  in  your 
Committee  being  the  first  in  the  field  with  its  announcement. 


172  REORGANIZATION  OF  CORPORATIONS 

A  bondholders'  committee  naturally  does  all  in  its  power  to 
encourage  deposits.  A  common  expedient  to  this  end  is  an 
offer  to  depositors  to  purchase  the  maturing  interest  coupons 
or  to  advance  the  maturing  interest  upon  the  security  of  the 
depositor's  bonds.  The  purchase  of  coupons  is  becoming  less 
frequent  than  formerly  because  modern  mortgages  do  not 
accord  to  interest  priority  of  lien  over  principal  and  often  con- 
tain provisions  for  subordinating  the  lien  of  purchased  coupons 
to  that  of  the  principal.  It  is  now  more  usual  to  offer  to  ad- 
vance the  maturing  interest,  at  the  depositor's  option,  upon  the 
security  of  his  bonds  and  coupons. 

The  announcement  of  the  formation  of  your  Committee  is 
likely  soon  to  be  followed  by  the  formation  of  other  protective 
committees  to  represent  other  classes  of  securities,  whether 
bonds  or  stock  or  unsecured  claims,  as  the  case  may  be.  Or 
there  may  be  a  rival  committee  calling  for  the  deposit  of  the 
bonds  of  the  same  issue  as  those  for  the  protection  of  which 
your  client's  committee  was  formed. 

If  need  be,  you  and  your  clients  should  arrange  that  com- 
mittees are  formed  to  represent  the  various  other  issues  of 
securities  which  are  likely  to  be  dealt  with  in  the  reorganization, 
for,  manifestly,  when  the  time  comes  to  prepare  a  Plan  it  is 
essential  that  there  should  be  representatives  of  the  other 
classes  of  securities  with  whom  your  clients  can  negotiate. 
Above  all  things,  see  to  it  that  neither  your  Committee  nor  any 
other  committee  represents  conflicting  interests.  It  is  a  rule 
to  which  there  are  few  exceptions  that  the  same  protective  com- 
mittee should  represent  but  one  class  of  securities.  It  is  rarely 
wise  that  the  same  committee  should  even  represent  both  pre- 
ferred and  common  stock,  because  some  of  the  most  perplex- 
ing questions  which  arise  in  reorganizations  are  as  to  the  equi- 
table adjustment  of  the  relative  participation  to  be  accorded  to 
pi  ef  erred  and  common  stock, 

I  emphasize  the  importance  to  your  clients  of  these  sugges- 
tions regarding  the  formation  of  committees  representing  the 


REORGANIZATION  OF  CORPORATIONS  173 

other  classes  of  securities  to  be  dealt  with,  because  the  success 
of  the  Plan  of  Reorganization  finally  adopted  may  be  just  as 
dependent  upon  the  support  of  the  holders  of  the  other  classes 
of  securities  as  it  is  upon  the  support  of  the  holders  of  the  par- 
ticular class  of  securities  which  your  clients  represent. 

The  same  person  should  not  be  a  receiver  and  a  member  of 
the  committee  representing  security  holders.  In  Fowler  v. 
Jarriy-CarJdw  Mortgage  Co.,1  Judge  Lacombe  refused  to  remove 
a  receiver  simply  upon  the  ground  that  he  was  a  member  of 
the  reorganization  committee,  and  said : 

"Several  Federal 


neutrality  on  the  part  of  its 

conflict  over  the  pan  of 

from  membershi    of  the 


The  suggestions  I  have  made  regarding  the  importance  of 
having  a  separate  committee  to  represent  each  class  of  securi- 
ties are  made  upon  the  assumption  that  protective  committees 
are  being  formed  with  a  view  to  ultimate  negotiations  looking 
towards  a  Plan  of  Reorganization.  It  occasionally  happens 
that  a  Plan  of  Reorganization  is  prepared  by  a  kiting  firm 
or  by  a  self-appointed  committee  without  having  previously 
called  for  the  deposit  of  securities.  In  such  a  case,  the  first 
announcement  made  is  of  the  Flan  of  Reorganization  in  which 
the  holders  of  the  various  classes  of  securities  are  invited  to 
participate.  In  such  a  case  a  single  committee,  or  a  banting 
firm  acting  as  reorganization  managers,  may  undertake  to  act 
for  the  security  holders  of  all  classes  in  carrying  out  that  par- 
ticular plan,  for  presumably  there  will  be  no  dash  of  interests 
between  the  various  classes  of  security  holders  in  carrying  out 
a  definite  Plan  to  which  they  have  indtratfd  AMT  adherence. 
In  such  a  case  the  proponents  of  the  Flan  announce  that  they 
have  prepared  a  Flan  of  Reorganization  which  they  regard  as 

163  Fed.  888;  IBM. 


174  REORGANIZATION   OF   CORPORATIONS 

fair  to  all  the  interests  affected  and  invite  the  various  classes  of 
security  holders  to  participate  in  it.  But  even  in  such  a  case 
there  is  danger  of  embarrassment  in  case  a  modification  of  the 
original  Plan  should  become  necessary,  for  the  reorganizers 
may  find  themselves  in  the  position  of  making  changes  that 
will  be  favorable  to  one  class  of  security  holders  and  unfavor- 
able to  another.  Such  a  modification  would  not  be  attempted, 
of  course,  without  submitting  it  to  the  security  holders  for  their 
adoption  or  rejection,  but  there  is  the  risk  of  losing  their  sup- 
port simply  because  they  would  feel  that  there  had  been  no 
independent  representation  of  the  various  conflicting  interests. 
Accordingly,  experienced  counsel  sometimes  prefer  in  cases 
where  a  Plan  of  Reorganization  is  announced  in  advance  to 
provide  for  a  separate  representation  for  each  important  interest 
affected  by  the  reorganization. 

We  have  now  completed  the  first  stage  of  our  campaign. 
The  property  is  in  the  hands  of  receivers,  a  bill  to  foreclose  the 
mortgage  securing  our  bonds  has  been  filed,  a  bondholders' 
protective  committee  has  been  formed,  the  agreement  defining 
its  powers  has  been  lodged  with  the  depositary,  and  the  pub- 
lication of  the  notice  calling  for  the  deposits  of  bonds  has 
begun. 

I  have  not  time  to  deal  with  the  infinite  variety  of  inter- 
mediate questions  with  which  you  will  have  to  deal  as  counsel 
to  the  bondholders'  committee  in  case  the  property  is  an  im- 
portant one  and  the  conditions  of  the  receivership  are  at  all 
complex.  In  railroad  reorganizations  you  are  apt  to  have 
interesting  problems  arising  out  of  the  issue  of  receiver's  cer- 
tificates and  the  application  of  the  rules  which  have  been 
worked  out  by  the  Federal  courts  according  priority  to  claims 
arising  out  of  the  current  operations  of  the  property.  These, 
which  have  come  to  be  popularly  known  as  "six  months 
claims,"  have  been  discussed  in  Mr.  Byrne's  lecture. 


REORGANIZATION   OF   CORPORATIONS  175 

The  Plan  and  Agreement  of  Reorganization 

We  will  now  pass  on  to  the  stage  when  your  clients  feel  that 
a  Plan  of  Reorganization  should  be  adopted.  It  is  assumed 
that  in  the  meantime  a  majority,  and  the  larger  the  majority 
the  better,  of  the  bonds  secured  by  the  mortgage  have  been 
deposited  with  your  Committee  and  that  progress  has  been 
made  with  the  foreclosure  proceedings.  One  of  the  funda- 
mental rules  of  tactics  which  you  should  always  have  in  mind 
as  counsel  for  a  bondholders'  committee  is  to  press  your  fore- 
closure proceedings  to  an  early  decree.  This  will  require  con- 
stant pressure  and  constant  vigilance,  "because  the  foreclosure 
proceedings  are  conducted,  not  by  yourself,  but  by  counsel  for 
the  trust  company  which  is  trustee  of  the  mortgage,  and  coun- 
sel for  trust  companies  are  proverbially  busy.  If  possible, 
get  your  decree  of  foreclosure  before  the  adoption  of  a  Plan  of 
Reorganization,  for  the  Plan  rarely  suits  every  interest  and  is 
very  apt  to  result  in  the  formation  of  opposition  groups  dis- 
posed to  adopt  obstructive  tactics  for  the  purpose  of  securing 
modifications,  and  their  best  opportunity  for  obstruction  is  in 
the  foreclosure  proceedings. 

Thus  far  it  has  been  possible  to  suggest  procedure  in  some 
measure  applicable  to  most  of  the  cases  which  are  likely  to 
arise,  but  when  we  approach  the  reorganization  stage  it  is  not 
possible  to  lay  down  fixed  rules.  Each  reorganization  presents 
its  own  questions  and  complications.  I  can  therefore  do  little 
more  than  discuss  some  of  the  problems. 

A  Plan  of  Reorganization  is  usually  the  result  of  negotiations 
between  two  or  more  committees  each  representing  a  different 
class  of  securities.  In  the  simplest  reorganization  there  is,  at 
least,  a  stockholders'  committee  and  a  bondholders'  committee. 
In  the  more  complex  reorganizations,  there  will  probably  be  a 
committee  for  the  preferred  stock,  one  for  the  common  stock, 
and  a  separate  committee  for  each  of  several  classes  of  obliga- 
tions ;  and  there  may  be  two  or  more  committees  representing 
securities  of  the  same  issue. 


176  REORGANIZATION   OF   CORPORATIONS 

If  the  Plan  of  Reorganization  results  from  an  agreement  on 
the  part  of  several  committees,  there  is  usually  a  joint  reorgani- 
zation committee  made  up  of  representatives  of  the  various 
committees  which  join  in  the  adoption  of  the  Plan,  although 
sometimes  the  Plan  is  carried  out  by  some  one  of  the  com- 
mittees under  an  agreement  with  the  others  or  by  a  banking 
firm  acting  as  Reorganization  Managers. 

We  will  now  assume  that  your  clients,  with  your  aid,  have 
agreed  with  the  committees  representing  the  other  interests 
upon  the  financial  structure  of  the  Plan  of  Reorganization  and 
that  you  have  been  appointed  counsel  to  the  joint  reorganiza- 
tion committee  or  the  reorganization  managers.  You  are  now 
confronted  with  the  preparation  of  the  formal  papers  required 
in  the  adoption,  promulgation  and  consummation  of  the  Plan. 
The  basic  papers  are  the  Plan  and  the  Agreement  of  Reorgani- 
zation. 

I  speak  of  the  Plan  and  Agreement  because  it  has  become  the 
custom  to  state  the  terms  of  the  reorganization  and  the  powers 
of  the  reorganizes  in  two  papers,  one  the  Plan,  which  con- 
tains the  financial  details  of  the  reorganization,  and  such  in- 
formation regarding  the  machinery  for  carrying  it  out  as  should 
be  communicated  to  the  ordinary  security  holder.  The  other 
paper  —  the  Agreement  —  is  usually  a  much  longer  and  more 
formidable  document.  It  contains  a  fuller  statement  of  the 
powers  of  the  Committee,  the  rights  of  participants  in  the 
Plan  and  the  machinery  for  carrying  the  Plan  into  execution. 
Few  documents  require  so  much  elaboration  and  such  frequent 
changes  in  their  preparation  as  a  Plan  of  Reorganization.  In 
important  reorganizations  it  is  usual,  both  for  convenience  and 
precision,  to  begin  securing  printed  proofs  of  the  Plan  during 
its  early  stages.  It  is  not  unusual  for  a  Plan  to  pass  through  a 
score  or  more  of  proofs  before  it  reaches  its  final  form. 

Again,  I  suggest  that  you  get  some  classic  model  to  serve  as 
a  skeleton  for  the  body  which  you  are  to  create.  Thus  you 
will  not  only  save  yourself  a  great  deal  of  trouble,  but  you  will 


REORGANIZATION   OF   CORPORATIONS  177 

get  the  benefit  of  the  experience  of  many  able  counsel  during 
the  last  quarter  of  a  century  during  which  the  law  and  practice 
regarding  reorganizations  have  largely  been  developed,  and 
furthermore,  you  will  be  adapting  your  Plan  to  established 
practices  so  that  it  will  be  more  readily  understood  by  the  aver- 
age investor  and  the  average  lawyer.  Most  modern  Plans  of 
Reorganization  follow  a  general  pattern  and  have  a  great  many 
features  in  common.  You  will  get  some  idea  of  the  enormous 
accumulation  of  experience  which  is  accessible  if  you  will  com- 
pare some  modern  Plan  of  Reorganization  with  one]  adopted, 
say,  twenty-five  years  ago.  You  will  find  that  the  old  plans 
follow  no  uniform  scheme  and  while  they  are  often  very  short 
and  simple,  they  seem  very  inadequate  to  the  modern  prac- 
titioner. 

Here  I  am  tempted  to  digress  to  offer  some  reflections  pro- 
voked by  the  length  and  complexity  of  modern  reorganization 
agreements  and  corporate  mortgages.  There  can  be  no  doubt 
that  instruments  of  this  class  have  attained  proportions,  both 
in  length  and  elaborateness  of  provision  for  all  conceivable 
eventualities,  of  which  the  wildest  imagination  of  the  practitioner 
of  fifty  years  ago  could  form  no  conception.  The  Wabash  Plan 
and  Agreement  of  Reorganization  of  1915  is  about  three  times 
as  long  as  the  Wabash  Plan  and  Agreement  of  Reorganization 
of  1887.  The  Baltimore  &  Ohio  Refunding  Mortgage  of  1915 
is  about  thirty  times  as  long  as  the  typical  Baltimore  and  Ohio 
mortgage  of  fifty  years  ago  and  eight  times  as  long  as  its  typical 
mortgage  of  twenty-five  years  ago.  Illustrations  might  be 
multiplied  indefinitely,  but  these  few  serve  to  illustrate  my 
point. 

There  is  a  common  impression  that  the  modern  long  re- 
organization agreement  or  corporate  mortgage  is  a  delusion 
and  a  snare  and  that  we  should  go  back  to  the  short  and  simple 
forms  which  our  fathers  used.  That  this  idea  is  entirely  wrong 
is  known  to  any  experienced  lawyer  of  to-day  who  has  had 
occasion  to  act  under  the  typical  reorganization  agreement  or 


ITS  REORGANIZATION   OF  CORPORATIONS 

corporate  mortgage  of  the  early  period.  The  provisions  of  the 
modern  reorganization  agreement  and  the  modern  corporate 
mortgage  are  the  result  of  the  experience  and  prophetic  vision 
of  a  great  many  able  lawyers.  Every  new  provision  is 
gested  either  by  some  decision  of  the  courts  or  by  an  actual 
experience  or  by  some  lawyer's  conception  of  a  possible  exi- 
gency. Ordinarily  in  drafting  a  document  a  lawyer  must  draw 
chiefly  upon  his  own  experience  and  the  results  of  his  own 
observation,  but  corporate  mortgages  and  reorganization  agree- 
ments are  public  documents  so  that  each  lawyer  can  have  the 
benefit  of  the  experience  of  many  others.  It  would  indeed  be  a 
courageous  man  who  would  say  that  any  of  the  provisions 
which  some  of  these  lawyers  have  conceived  to  be  wise  should 
be  rejected  simply  because  he  cannot  for  the  moment  think 
when  or  how  it  win  become  useful. 

I  doubt  not  that  the  modern  corporate  mortgage  and  the 
modern  reorganization  agreement  are  needlessly  long  and  need- 
lessly complex,  but  the  genius  who  has  the  combination  of  time, 
wisdom  and  experience  materially  to  shorten  and  simplify, 
without  weakening,  them  has  not  yet  appeared.  How  difficult 
is  the  task  is  known  to  every  experienced  New  York  lawyer 
having  occasion  to  pass  upon  a  mortgage  evolved  by  the  wisest 
country  lawyer  or  even  by  a  leader  of  the  New  York  Bar  who 
has  had  the  hardihood  to  discard  precedent  and  attempt  to 
draw  a  simple  railroad  mortgage  or  a  simple  Plan  of  Reorgani- 
I  advise  you  to  adhere  to  precedent  and,  in  most 
you  wiO  find  the  long  reorganization  agreement  based  on 
precedent  much  safer  than  the  agreement  hah*  as  long  drawn 
by  your  neighbor  who  scorns  precedent. 

We  now  return  from  our  digression  to  consider  the  typical 
flan  and  Agreement  of  Reorganization.  I  hold  in  my  hand  a 
typical  Plan  and  Agreement.  On  the  cover  of  the  first  page 
are  the  names  of  the  Joint  Reorganization  Committee,  its  coun- 
sel and  secretary,  the  names  of  the  various  committees  which 
joined  in  the  adoption  of  the  Plan  and  in  the  appointment  of 


REORGANIZATION  OF  CORPORATIONS  179 

the  joint  reorganization  committee  and  the  names  of  the  de- 
positary of  each  dass  of  securities.  Then  follows  the  introduc- 
tory statement  which,  without  going  into  precise  details,  briefly 
presents  the  causes  which  led  to  the  insolvency  of  the  corpora- 
tion, the  measures  taken  by  the  committees  for  the  investiga- 
tion of  the  property,  a  brief  summary  of  the  results  of  that 
investigation  and  of  the  reasons  why  the  Plan  is  regarded  as 
effective  to  accomplish  the  purposes  in  view  and  is  deemed  to 
be  fair  to  the  various  classes  of  security  holders. 

Then  follows  the  Plan  itself,  which,  as  I  have  already  said, 
is  intended  to  give  the  financial  details  of  the  reorganization. 
It  begins  with  a  statement  of  the  present  securities  outstanding, 
subdivided  into  underlying  bonds  which  are  not  to  be  disturbed, 
and  those  which  are  to  be  dealt  with  under  the  Plan.  Then 
follows  a  statement  of  the  cash  requirements,  a  description  of 
the  new  securities,  a  statement  of  the  distribution  of  the  new 
securities  among  the  various  classes  of  existing 


table  showing  at  a  glance  what  the  holders  of  each  dass  of 
existing  securities  will  receive  under  the  Plan,  the  provision 
made  for  underwriting,  a  statement  of  the  terms  and  conditions 
of  the  cash  assessment  to  be  paid  by  the  assenting  stockholders 
and  bondholders,  a  statement  of  the  capitalization  and  fixed 
charges  of  the  new  company,  showing  the  reduction  in  caphali- 
zation  and  the  reduction  in  fixed  charges  to  be  accomplished 
by  the  reorganization,  the  provision  made  for  unsecured  cred- 
itors, and  the  designation  of  the  joint  reorganization  committee. 
Then  follows  what  should  be  present  in  every  Plan  of  Reorgani- 
zation, a  provision  that  the  statements  contained  in  the  Plan 
have  been  compiled  from  sources  believed  to  be  accurate  and 
reliable,  but  that  certain  of  them  are  only  approximate  and 
none  of  them  are  to  be  construed  as  representations.  There  is 
then  a  precise  statement  of  the  method  and  terms  of  participa- 
tion in  the  Plan  by  the  various  security  holders  showing  under 
a  separate  heading  what  the  holders  of  each  dass  of  securities 
must  do  in  order  to  participate  in  the  Han.  The  Plan  doses 


180  REORGANIZATION   OF   CORPORATIONS 

with  a  reference  to  the  agreement  of  reorganization  and  the 
statement  that  its  provisions  shall  govern  in  case  they  conflict 
with  the  Plan. 

Your  effort  should  be  to  make  the  Plan  clear,  succinct  and 
accurate,  and,  so  far  as  possible,  free  from  legal  technicalities 
and  unnecessary  details.  .You  should  save  for  the  reorganiza- 
tion agreement  all  provisions  which  are  not  deemed  essential 
to  inform  the  security  holder  regarding  the  essential  elements 
of  the  Plan  and  the  procedure  for  his  participation. 

The  typical  agreement  of  reorganization  which  I  hold  in  my 
hand  is  thirteen  pages  long.  The  parties  to  it  are  the  Joint 
Reorganization  Committee,  parties  of  the  first  part,  the  holders 
of  the  certificates  of  deposit  issued  by  the  various  depositaries, 
parties  of  the  second  part,  and  the  depositaries  under  the 
Plan,  parties  of  the  third  part.  This  particular  agreement  pro- 
ceeds upon  the  assumption  that  holders  of  securities  shall  join 
in  the  Plan  by  depositing  their  securities  with  the  depositary 
of  the  proper  protective  committee.  It  is  sometimes  provided 
that  holders  of  undeposited  securities  shall  join  in  the  Plan  by 
depositing  their  securities  with  a  new  depositary  appointed 
under  the  reorganization  agreement.  The  former  course  is  less 
likely  to  cause  confusion,  inasmuch  as  it  provides  for  but  one 
class  of  certificates  of  deposit  representing  each  class  of  securities. 

The  purpose  of  the  reorganization  agreement  is  to  give  the 
Committee,  as  nearly  as  may  be,  authority  to  exercise  all  the 
powers  of  owner  of  the  deposited  securities  and  moneys  for  the 
purpose  of  carrying  out  the  Plan  and  to  provide  a  ready  means 
for  securing  the  assent  of  depositors  to  any  modification  of  the 
Plan  that  the  Committee  may  deem  wise.  It  is  very  important 
that  counsel  should  see  that  the  powers  conferred  by  the  agree- 
ment are  sufficiently  broad  to  meet  every  probable  emergency, 
because  he  would  be  chagrined  beyond  measure  if  it  developed 
that  through  some  omission  in  the  Agreement  the  Committee 
lacked  the  power  to  deal  with  an  emergency  which  should  have 
been  foreseen  and  was  compelled  to  submit  to  the  expense, 


REORGANIZATION  OF  CORPORATIONS     181 

delay  and  risk  involved  in  submitting  to  the  depositors  a  formal 
modification  of  the  agreement  for  the  purpose  of  conferring 
additional  power.  The  grant  of  power  can  hardly  be  too  broad, 
so  long  as  it  is  confined  to  the  carrying  out  of  the  Plan  which 
the  Committee's  constituents  are  asked  to  approve.  Provided 
always  that  this  limitation  is  preserved,  you  will  be  surprised 
to  find  how  willing  security  holders  are  to  place  almost  unlimited 
power  in  a  committee  of  reputable  men. 

On  the  other  hand,  as  no  one  can  be  certain  that  every 
emergency  has  been  foreseen,  it  is  important  that  the  provi- 
sions for  modifying  the  Plan  and  Agreement  should  be  broad 
enough  not  only  to  provide  for  a  modified  Plan,  but  also  for 
any  increase  in  the  powers  of  the  Committee  that  may  be  re- 
quired to  carry  out  the  original  Plan.  The  agreement  should 
be  so  drawn  that  any  additional  grant  of  power  that  may  be 
required  can  be  obtained  by  filing  a  statement  of  the  modifica- 
tion with  the  depositary  which  shall  become  binding  upon  all 
depositors  unless  they  affirmatively  exercise  the  privilege  of  re- 
jecting the  modification  by  the  withdrawal  of  their  securities. 

Practical  Questions  Arising  in  Connection  with  Reorganizations 

I  shall  now  discuss  a  few  of  the  practical  questions  which 
are  apt  to  arise  in  connection  with  reorganizations. 

The  theory  of  a  Plan  of  Reorganization  based,  as  most  re- 
organizations are,  upon  the  foreclosure  of  one  or  more  mort- 
gages or  upon  the  enforcement  of  the  rights  of  creditors  in 
some  other  form,  is  that  the  Reorganization  Committee  be- 
comes the  owner  of  the  deposited  securities.  It  acquires  the 
property  of  the  old  company  by  purchase  at  the  sale  held  pur- 
suant to  a  decree  of  foreclosure  or  judgment  and  then  transfers 
it  to  a  new  corporation  which  the  Committee  has  organized, 
receiving  as  consideration  therefor  the  new  securities,  whether 
obligations  or  shares  of  stock,  or  both,  required  to  carry  out  the 
Plan.  The  Master's  deed  runs  to  the  Committee's  represen- 


182  REORGANIZATION   OF   CORPORATIONS 

tative,  who  in  turn  executes  a  deed  to  the  new  corporation; 
or  the  Master's  deed  may  run  directly  to  the  new  corporation, 
the  Committee's  representative  having  assigned  thereto  his 
rights  under  his  bid.  The  Committee  thus  becomes  the  owner 
of  the  new  securities,  subject  to  its  obligation  to  distribute 
them  pursuant  to  the  Plan. 

It  is  manifest  that,  in  practice,  a  Reorganization  Committee 
will  always  have  to  provide  a  certain  amount  of  money  - 
sometimes  a  very  large  amount.  It  must  have  money  for  its 
own  expenses  and  for  the  distributive  share  of  the  proceeds  of 
sale  to  which  the  holders  of  the  obligations  not  joining  in  the 
Plan  are  entitled.  Money  is  frequently  required  to  retire  re- 
ceivers' certificates  and  underlying  liens,  and  almost  every 
reorganization  provides  fresh  capital  for  the  enterprise. 

This  money  may  be  provided  in  a  variety  of  ways,  but  it  is 
usually  provided  by  means  of  a  so-called  "assessment"  upon 
the  holders  of  the  securities  which  represent  the  equity  in  the 
property  junior  to  the  obligations  which  are  being  enforced  - 
an  equity  which,  presumably,  would  be  wiped  out  by  the  strict 
enforcement  of  those  obligations.  The  Committee,  in  effect, 
says  to  the  holders  of  these  junior  securities,  usually  stock- 
holders :  if  you  wish  to  retain  your  equity  or  some  share  of  it 
you  must  provide  part  or  all  of  the  cash  required  by  the  Plan. 
For  the  cash  which  the  owners  of  the  equity  are  thus  required 
to  provide  as  a  condition  to  participation  in  the  reorganization 
they  are  usually  given  some  form  of  security,  either  new  shares 
of  stock  or  obligations. 

Assuming  that  the  control  of  the  reorganization  is  in  the 
hands  of  a  Bondholders'  Committee,  its  aim  is  to  transfer  to 
the  stockholders  the  burden  of  furnishing  the  new  cash  required 
at  the  least  possible  cost  to  the  bondholders.  You  may  safely 
be  influenced  by  the  natural  impulse  of  the  average  stockholder 
to  protect  his  investment  and  to  stay  in  the  property  even  at 
the  price  of  an  additional  investment  involving  some  peril. 
It  is  usually  wise  not  to  require  the  payment  of  any  assessment 


REORGANIZATION   OF   CORPORATIONS  183 

with  the  deposit  of  securities,  for  the  securities  are  usually 
sufficient  security  for  the  payment  of  the  assessment  when 
called. 

I  have  used  the  term  "  assessment "  as  describing  the  pay- 
ments required  of  stockholders  and  others  interested  in  the 
equity  as  a  condition  to  their  participation  in  a  reorganization 
because  it  is  the  term  commonly  used.  It  is,  however,  in- 
accurate, inasmuch  as  on  final  analysis  the  opportunity  offered 
is  to  purchase  from  the  Committee  a  portion  of  the  securities 
which  are  to  be  issued  to  it  by  the  new  company  in  return  for 
the  property  acquired  and  for  the  cash  provided  under  the 
Plan.  It  is  simply  a  sale  of  securities. 

In  order  to  insure  the  success  of  the  Plan,  it  is  usual  to 
arrange  in  advance  with  bankers  or  with  a  syndicate  to  under- 
write the  cash  requirements,  that  is,  to  agree  to  purchase  such 
of  the  securities  offered  to  the  security  holders  interested  in  the 
equity  as  may  not  be  taken  by  them.  The  announcement  that 
the  Plan  has  been  underwritten  usually  has  the  effect  of  prac- 
tically insuring  the  participation  of  the  greater  part  of  the 
security  holders  interested  in  the  equity. 

Underwriters  usually  receive  a  cash  commission  upon  their 
maximum  obligation.  If  all  the  security  holders  who  are 
assessed  pay  their  assessment,  no  payment  is  required  of  the 
underwriters  and  they  simply  receive  their  cash  commission 
for  the  obligation  which  they  have  assumed.  If,  on  the  other 
hand,  only  a  portion  of  the  security  holders  pay  their  assess- 
ment, the  underwriters  provide  the  remainder  of  the  cash  and 
receive,  in  addition  to  the  cash  commission,  the  new  securities 
which  would  have  gone  to  the  non-assenting  security  holders 
had  they  assented  to  the  Plan. 

Plans  of  reorganization  are  rarely  strictly  logical.  If  they 
were,  the  practice  would  be  to  limit  participation  on  the  part 
of  holders  of  the  old  securities  to  such  of  them  as  have  a  real 
interest  in  the  property  based  upon  its  value  as  a  going  concern. 
For  instance,  with  a  property  deemed  to  be  worth  $12,000,000, 


184  REORGANIZATION   OF  CORPORATIONS 

against  which  there  are  $10,000,000  of  bonds,  $5,000,000  of 
preferred  stock  and  $10,000,000  of  common  stock,  it  can  be 
seen  at  a  glance  that  there  is  no  equity  for  the  common  shares 
and  the  logical  course  would  be  to  exclude  them  and  confine 
the  participation  in  the  reorganization  to  the  bondholders  and 
the  preferred  stockholders.  But  this  rarely  happens  in  prac- 
tice. Bondholders  usually  want  to  escape  or  reduce  the  burden 
of  raising  the  new  money  required  for  the  property  by  appeal- 
ing to  the  impulse  of  the  stockholders  to  protect  their  invest- 
ment, so  that  stockholders  are  frequently  offered  a  participa- 
tion in  the  reorganization,  conditioned  upon  the  payment  of  an 
assessment,  even  though  upon  no  theory  of  valuation  would 
the  aggregate  value  of  the  property  exceed  the  amount  of  the 
prior  securities. 

The  difficulty  in  securing  underwriters  to  underwrite  the 
assessment  of  stockholders  whose  equity  is  so  attenuated  that 
there  is  room  for  doubt  as  to  their  willingness  to  pay  an  assess- 
ment, may  be  met  by  requiring  the  holders  of  the  securities 
next  in  line  to  act  as  intermediate  underwriters  of  the  assess- 
ment and  forming  a  syndicate  to  underwrite  the  participation 
of  this  last  class  of  securities.  For  instance,  at  the  time  of  the 
promulgation  of  the  Plan  for  the  reorganization  of  the  Wabash 
Railroad  Company  last  year  the  market  value  of  its  preferred 
and  common  shares  had  dwindled  to  almost  nothing.  The 
cash  requirements  of  the  Plan  were  over  $27,000,000.  The 
Plan  levied  an  assessment  of  $30  per  share  upon  the  preferred 
and  common  stockholders  alike  and  for  this  assessment  new 
Five  Per  Cent.  Profit  Sharing  Preferred  stock  and  common 
stock  was  offered.  It  was  doubtful  whether  stockholders 
would,  in  any  considerable  number,  pay  the  assessment,  and  it 
was  manifest  that  a  syndicate  could  not  be  formed  to  under- 
write the  participation  of  the  stockholders.  Accordingly,  the 
Plan  provided  that  the  bondholders  whose  mortgage  was  being 
foreclosed  should  be  required,  in  effect,  to  underwrite  the  par- 
ticipation of  the  stock,  that  is,  to  provide  such  part  of  the  cash 


REORGANIZATION  OF  CORPORATIONS     185 

requirements  as  was  not  furnished  by  the  stockholders,  and  an 
underwriting  syndicate  was  formed  to  provide  such  part  of  this 
remainder  as  the  bondholders  failed  to  pay. 

Another  interesting  illustration  is  furnished  by  the  recent 
reorganization  of  an  important  industrial  company  which  had 
outstanding  about  $10,000,000  of  bonds,  $11,000,000  of  pre- 
ferred stock  and  $17,000,000  of  common  stock.  The  property 
if  sold  at  forced  sale  would  not  yield  enough  to  pay  the  bonds. 
At  the  time  the  Plan  was  promulgated  the  bonds  were  selling 
on  the  market  at  about  forty-four  per  cent,  of  par,  the  preferred 
shares  at  six  per  cent,  of  par  and  the  common  shares  at  three 
per  cent,  of  par.  The  cash  requirement  of  the  Plan  was  about 
$3,600,000,  which  was  to  be  provided  by  an  assessment  of  $12.50 
per  share  upon  the  preferred  and  common  stock  and  new  first 
preferred  stock  was  to  be  issued  at  par  for  the  cash  assessment. 
The  bondholders  insisted  that  the  preferred  stock  should  under- 
write the  assessment  of  the  common  stock,  that  is  to  say,  that 
to  such  extent  as  the  common  stockholders  failed  to  pay  the 
assessment  of  $12.50  per  share  their  place  should  be  taken  by 
the  preferred  stock,  so  that  the  syndicate  practically  under- 
wrote the  participation  of  the  preferred  shares.  As  a  matter  of 
fact,  so  strong  was  the  impulse  of  the  common  stockholders  to 
stay  by  their  investment  that  they  paid  the  assessment  with 
substantial  unanimity,  leaving  but  an  insignificant  fraction  of 
their  burden  to  be  assumed  by  the  preferred  stock. 

An  important  question  for  counsel  in  connection  with  a 
modern  reorganization  is  as  to  the  aggregate  amount  of  the 
new  securities.  I  am  not  now  referring  to  the  financial  aspects 
of  the  new  capitalization,  such  as  the  amount  of  the  fixed  charges, 
the  rate  of  interest  upon  the  obligations  and  the  rate  of  divi- 
dends upon  the  preferred  stock,  because  those  are  questions 
which  primarily  concern  the  financier  rather  than  the  lawyer; 
I  refer  to  the  amount  of  capitalization  which  the  law  will  per- 
mit, for  that  is  a  question  primarily  for  counsel.  In  the  old 
days,  before  we  had  public  service  commissions  and  before  the 


186  REORGANIZATION   OF   CORPORATIONS 

courts  had  begun  seriously  to  enforce  the  laws  regarding  the 
liability  to  creditors  of  holders  of  partly  paid  stock,  very  little 
attention  was  paid  to  the  amount  of  new  securities  so  far  as 
questions  as  to  their  validity  or  stockholders'  liability  were  con- 
cerned. The  lawyer  usually  was  prepared  to  provide  his  client 
with  as  large  an  amount  of  new  securities  as  he  wanted.  In 
those  days,  it  frequently  happened,  particularly  in  the  case  of 
industrial  enterprises,  that  reorganizations  resulted  in  increas- 
ing the  aggregate  amount  of  securities  outstanding,  and  re- 
organizers  were  very  apt  to  try  to  make  up  for  what  the  securi- 
ties lacked  in  quality  by  increasing  their  quantity.  In  railroad 
reorganizations,  practically  the  only  limit  of  capitalization 
which  was  recognized  was  the  par  amount  of  the  old  securities 
plus  the  new  capital.1  Those  days  are  past.  Railroad  re- 
organizations now,  in  most  instances,  must  be  approved  by 
the  public  service  commissions,  and  if  the  railroad  which  you 
propose  to  mortgage  in  carrying  out  your  Plan  happens  to  run 
through  half  a  dozen  States  you  are  lucky  if  you  do  not  have 
to  deal  with  as  many  public  service  commissions.  If  your 
client  has  had  the  painful  experience  of  having  been  forced  to 
respond  to  creditors  as  the  holder  of  stock  which  turned  out 
not  to  be  fully  paid,  he  is  apt,  particularly  in  the  case  of  indus- 
trial corporations,  to  insist  that  you  assure  him  that  the  stock 
which  he  is  to  acquire  is  fully  paid  and  carries  no  risk  of  per- 
sonal liability  to  creditors. 

There  are  as  yet  very  few  precedents  and  very  few  authori- 
ties to  guide  counsel  in  determining  what  must  be  done  to 
make  plans  of  reorganization  conform  to  the  requirements  of 
the  public  service  commissions  of  the  various  States,  because 
very  few  large  reorganizations  have  been  carried  through  since 
public  service  commissions  became  the  rule  rather  than  the 
exception.  The  first  of  the  present  crop  of  reorganizations  of 
interstate  railroads  escaped  the  public  service  commissions  be- 
cause the  Plan  did  not  involve  the  creation  of  a  mortgage. 

1  See  Memphis  &  Little  Rock  R.  R.  v.  Dow,  120  U.  S.  287 ;  1887. 


REORGANIZATION  OF  CORPORATIONS     187 

The  law  seemed  to  be  clear,  in  that  case  at  least,  that  a  corpora- 
tion organized  under  the  laws  of  one  State  to  acquire  an  inter- 
state railroad  running  through  several  States  could  acquire  the 
property  at  foreclosure  sale  without  consulting  the  public  serv- 
ice commissions  of  the  other  States,  but  that  any  reorganiza- 
tion involving  the  creation  of  a  mortgage  would,  in  effect,  have 
required  the  approval  of  the  public  service  commission  of 
every  State  into  which  the  mortgaged  lines  extended. 

The  Plan  for  the  reorganization  of  one  of  the  great  railroad 
systems  now  in  receivers'  hands,  after  having  been  worked  out 
with  infinite  care  and  after  months  of  negotiation,  has  just 
been  halted  by  the  first  public  service  commission  to  which  it 
was  submitted,  and  their  decision  seems  to  recognize  no  fixed 
principles  by  which  the  reorganizers  can  be  guided. 

In  the  case  of  some  railroad  systems  which  must  soon  be  re- 
organized the  difficulties  in  the  way  of  reorganization  presented 
by  the  conflicting  requirements  of  the  laws  of  the  various  States 
concerned  and  possible  conflict  between  the  requirements  of 
the  public  service  commissions  in  the  respective  States  are 
appalling.  It  is,  I  am  sure,  the  ardent  prayer  of  every  railroad 
reorganizer,  as  it  is  of  most  railroad  officials,  that  a  Federal 
incorporation  law  will  bring  relief  from  the  intolerable  condi- 
tions resulting  from  conflicting  State  laws  and  clashing  public 
service  commissions. 

In  most  States,  the  law  makes  it  the  duty  of  the  public  serv- 
ice commissions  to  limit  the  securities  to  be  issued  upon  re- 
organization to  the  value  of  the  property.  In  this  State,  the 
Public  Service  Commission  law,  enacted  in  1907  *  at  the  in- 
stance of  Governor  Hughes,  expressly  provides  that  in  valuing 
the  property  of  a  public  service  corporation  as  a  basis  for  the 
issue  of  securities  no  value  shall  be  attributed  to  the  corpora- 
tion's franchises  beyond  the  amount  paid  the  State  therefor. 
When  the  insolvent  street  railway  corporations  of  Manhattan 
and  The  Bronx  came  to  be  reorganized  several  years  ago  the 

1  N.  Y.  Consolidated  Laws. 


188  REORGANIZATION   OF   CORPORATIONS 

Public  Service  Commission  for  the  First  District  insisted  that 
the  amount  of  the  new  securities  which  it  would  authorize  was 
measured  by  the  then  value  of  the  Corporation's  property, 
exclusive  of  its  franchises.  The  Court  of  Appeals,  however, 
held  in  the  Third  Avenue  Railway  Case  l  that  under  the  so-called 
reorganization  statute 2  new  securities  could  be  issued  at  least 
to  the  amount  of  the  old  securities  plus  the  additional  cash 
paid  in,  regardless  of  the  value  of  the  property.  The  Legisla- 
ture, however,  promptly  amended  the  law 3  so  that  to-day,  in 
the  case  of  reorganizations,  as  in  the  case  of  new  enterprises,  the 
securities  must  not  "exceed  the  fair  value  of  the  property  in- 
volved." 

Reorganizations  of  industrial  corporations  in  this  country 
are  not  under  governmental  supervision,  nor  are  they,  nor  for 
that  matter  are  railroad  reorganizations  in  this  country,  sub- 
ject to  the  supervision  of  the  courts.  In  England,  statutes 
require  that  Plans  for  the  reorganization,  or,  to  use  the  terms 
of  the  English  statute,  for  the  "reconstruction"  of  corporations, 
shall  have  the  approval  of  the  courts.4  The  Plan  must  be  filed 
by  its  proponents  with  the  Court  as  a  public  document  and  an 
opportunity  must  be  afforded  to  security  holders  to  file  objec- 
tions upon  which  they  are  entitled  to  a  hearing  and  the  Plan 
does  not  become  finally  effective  until  it  has  been  approved  by 
the  Court.  It  then  becomes  binding  upon  all  security  holders 
whether  they  have  assented  or  not. 

The  limitations  imposed  by  our  Federal  Constitution  create 
difficulties  in  the  way  of  working  out  in  this  country  any 
scheme  of  public  supervision  of  reorganization  which  would 
compel  non-assenting  security  holders  to  accept  plans  of  re- 
organization against  their  will  or  compel  mortgagees  or  other 
creditors  to  surrender  the  right  of  doing  as  they  please  with 

^OSN.  Y.  299;  1911. 

2  Stock  Corporation  Law,  §  9  (N.  Y.  Consolidated  Laws) . 

3  Public  Service  Commissions  Law,  §§  55a  and  69a    (N.   Y.  Consolidated 
Laws). 

*  English  Companies  Act,  Part  IV,  Sections  129,  182,  199. 


REORGANIZATION  OF  CORPORATIONS  189 

their  own  property.  Without  the  power  to  compel  the  accept- 
ance of  reorganization  terms  by  non-assenting  security  holders, 
I  fear  that  public  regulation  of  reorganizations,  like  so  much 
other  public  regulation  in  this  country,  would  simply  mean  the 
power  to  harm  without  effective  power  to  help. 

Twenty  years  ago  Kentucky  adopted  a  statute 1  regulating 
the  reorganization  of  insolvent  railroad  and  bridge  companies 
which  was  modeled  upon  the  English  procedure.  This  statute 
was  hailed  as  the  beginning  of  a  great  reform  by  Mr.  Moorfield 
Storey  in  his  address  as  President  of  the  American  Bar  Asso- 
ciation in  1896,  but  even  that  statute  recognized  the  constitu- 
tional difficulties  in  the  way  of  the  unrestricted  adoption  of  the 
English  system  by  providing  that 

"where  claims  have  arisen  or  securities  have  been  issued  prior  to  the 
passage  of  this  act,  and  any  holder  of  such  claim  or  securities  shall 
object  to  the  plan  or  reorganization,  there  shall  be  inserted  in  such  a 
plan  a  provision  for  preserving  and  maintaining  the  right  of  such 
holder  so  as  not  to  impair  the  obligation  of  his  contract." 

While  the  laws  of  several  States  either  directly  or  in  practical 
effect  require  that  the  reorganization  of  public  service  corpora- 
tions shall  be  subject  to  supervision  by  their  Public  Service 
Commissions,  no  State,  so  far  as  I  know,  has  followed  the  ex- 
ample of  Kentucky  in  adopting  a  statute  which  attempts  to 
make  reorganizations  approved  by  the  Commission  or  by  a 
certain  portion  of  the  security  holders  binding  upon  the  non- 
assenting  bondholders.  Public  regulation  of  reorganizations 
has  very  recently  received  the  support  of  Judge  Hough  of  the 
United  States  District  Court  for  this  District,2  who  in  a  recent 
opinion  said : 

"There  is  a  good  deal  to  be  said  in  favor  of  a  new  scheme  of  law 
which  would  in  some  way  confer  upon  an  impartial  and  disinterested 
tribunal  the  entire  supervision  of  corporate  reorganizations.  .  .  ." 3 

1  Kentucky  Statutes,  §771-A. 

2  Southern  District  of  N.  Y. 

3  Guaranty  Trust  Co.  of  New  York  v.  International  Typesetting  Machine  Co. 
(not  yet  reported). 


190  REORGANIZATION   OF   CORPORATIONS 

Judge  Hough  added  in  a  public  interview  that  this  "  was  .  .  . 
the  expression  of  a  hope"  which  he  did  "not  expect  to  live  to 
see  realized." 

There  is  an  erroneous  impression  that  the  Federal  Courts 
exercise  supervision  over  reorganizations.  Several  years  ago  a 
United  States  Circuit  Judge  endeavored  to  use  the  power  of 
the  Court  to  force  a  Plan  of  Reorganization  upon  unwilling 
bondholders.  The  Plan  was  doubtless  a  beneficent  one,  but 
the  United  States  Circuit  Court  of  Appeals,  presided  over  by 
Mr.  Justice  Brewer  of  the  Supreme  Court,  very  promptly  con- 
vened and  set  aside  the  order.1  Mr.  Justice  Brewer  in  his 
opinion  said  (p.  927) : 

"There  is  no  wide  discretion  vested  in  the  chancellor  which  permits 
him  to  disturb  contract  rights  —  rights  of  property," 

and  quoted  the  language  of  the  United  States  Supreme  Court 
in  Kneeland  v.  American  Loan  Co.,2  where  it  said  (p.  97) : 

' '  One  holding  a  mortgage  debt  upon  a  railroad  has  the  same  right 
to  demand  and  expect  of  the  Court  respect  for  his  vested  and  con- 
tracted priority  as  the  holder  of  a  mortgage  on  a  farm  or  lot.  .  .  . 
We  emphasize  this  fact  of  the  sacredness  of  contract  liens,  for  the 
reason  that  there  seems  to  be  growing  an  idea  that  the  chancellor, 
in  the  exercise  of  his  equitable  powers,  has  unlimited  discretion  in  this 
matter  of  the  displacement  of  vested  liens.' " 

Mr.  Justice  Brewer  goes  on  to  say,  referring  to  the  Plan  of 
Reorganization  (p.  929) : 

"Now,  that  may  be  a  wise  business  proposition,  and  if  the  court 
had  power  to  take  hold  of  these  things  and  do  for  the  people,  who  are 
mortgage  bondholders,  that  which  it  thinks  best  for  them,  we  might 
have  no  hesitation  in  sustaining  this ;  but  every  man  in  this  country 
decides  questions  in  respect  to  his  own  property  for  himself." 

There  have,  of  course,  been  not  infrequent  instances  in 
which  the  courts  have  successfully  interfered  with  the  execu- 
tion of  plans  of  reorganization,  but,  in  every  case,  upon  the 

1  Merchants  Loan  &  Trust  Co.  v.  Chicago  Rys.  Co.,  158  Fed.  923 ;    1907. 

2  136  U.  S.  89 ;  1890. 


REORGANIZATION   OF   CORPORATIONS  191 

theory  that  some  legal  right  was  being  violated,  as  in  the  well 
known  Monon  case,1  where  the  Supreme  Court  upheld  the 
power  of  a  court  of  equity  to  set  aside  a  foreclosure  decree  upon 
the  ground  that  it  was  intended  to  carry  out  a  conspiracy  be- 
tween the  holders  of  the  mortgage  debt  and  the  stockholders  of 
the  corporation  to  bring  about  a  needless  default  under,  and  a 
foreclosure  of,  the  mortgage,  for  the  purpose  of  transferring 
the  mortgaged  property  to  a  new  corporation  in  which  the 
stockholders  of  the  old  corporation  should  have  an  interest  to 
the  exclusion  of  the  floating  debt.  When  the  case  reached  its 
second  trial  the  Circuit  Judge  dismissed  the  charge  of  con- 
spiracy and  sustained  the  foreclosure  decree.2  There  is  no  in- 
stance in  the  books,  so  far  as  I  know,  where,  at  the  instance  of 
stockholders,  the  courts  of  this  country  have  interfered  with 
plans  of  reorganization  proposed  by  bondholders,  unless  the 
validity  of  the  foreclosure  decree  could  be  attacked. 

Three  years  ago  the  Supreme  Court,  in  a  decision  fore- 
shadowed by  its  opinion  in  the  Monon  case,  placed  a  very 
serious  and  unexpected  limitation  upon  the  power  of  mortgage 
bondholders  to  deal  in  reorganizations  with  property  purchased 
at  foreclosure  sale.  I  refer  to  the  decision  in  Northern  Pacific 
Railroad  Company  v.  Boyd.8  If  you  are  to  have  to  do  with 
reorganizations,  you  should  know  about  this  decision,  because 
if  you  do  not  you  are  very  likely  to  be  subjected  to  the  humilia- 
tion of  being  told  about  it  by  your  client.  In  reorganizations 
of  to-day  a  very  large  part  of  the  time  and  energy  of  bond- 
holders' committees  and  their  counsel  are  devoted  to  discussion 
of  the  Boyd  case  and  the  possible  means  of  meeting  its  require- 
ments. It  will  accordingly  be  worth  our  while  to  consider  it 
with  some  care. 

The  Northern  Pacific  Railway  Company  was  reorganized 
about  twenty  years  ago.  The  mortgage  bonds  and  the  re- 

1  Louisville  Trust  Company  v.  Louisville,  New  Albany  and  Chicago  Ry.  Co., 
174  U.  S.  674 ;    1899. 

2  Farmers'  Loan  &  Trust  Co.,  et  al.  v.  Louisville,  N.  A.  &  C.  Ry.  Co.,  et  al.t 
103  Fed.  110;  1900.  3  228  U.  S.  482  ;  1913  (Boyd  Case). 


192     REORGANIZATION  OF  CORPORATIONS 

ceivers'  certificates  aggregated  $157,000,000  and  there  was  a 
large  issue  of  stock.  The  reorganization  was  primarily  a  bond- 
holders' reorganization  based  upon  the  foreclosure  of  their 
mortgage.  The  Plan  of  Reorganization  gave  to  the  old  pre- 
ferred stock  50  per  cent  in  new  preferred  stock  and  50  per  cent 
in  new  common  stock  on  paying  an  assessment  of  $10  per 
share,  and  to  the  old  common  stock  100  per  cent  in  new  com- 
mon stock  on  paying  an  assessment  of  $15  per  share.  The 
aggregate  assessment  was  $11,000,000.  The  capitalization  of 
the  new  company  was  to  be  $190,000,000  in  bonds,  $75,000,000 
in  preferred  stock  and  $80,000,000  in  common  stock,  a  total  of 
$345,000,000,  and  this  capitalization  was  based  upon  the  assump- 
tion, or  one  might  say  fiction,  that  the  property  then  had  a 
value  of  $345,000,000.  No  provision  was  made  in  the  Plan 
for  the  floating  debt,  which  was  considerable. 

A  committee  of  unsecured  creditors  sought  to  defeat  the 
foreclosure  suit  upon  the  ground  that  it  was  the  result  of  a 
conspiracy  between  bondholders  and  stockholders  to  exclude 
the  floating  debt  and  to  turn  over  the  valuable  equity  in  the 
property  to  the  stockholders.  This  effort  was  unsuccessful, 
the  Circuit  Court  holding  that  the  assets  were  insufficient  to 
pay  the  mortgage  debt  and  the  net  earnings  insufficient  to  pay 
the  fixed  charges  and  that  there  was  no  equity  in  the  property 
out  of  which  unsecured  creditors  could  be  paid  and  that  there 
was  no  reason  why  the  mortgage  bondholders  in  purchasing  the 
property  at  foreclosure  sale  should  not  make  any  arrangements 
they  chose  for  the  participation  of  the  old  stockholders  in  the 
ownership  of  the  stock  of  the  reorganized  company.1  No 
appeal  was  taken  from  this  decision. 

The  property  was  bought  in  at  foreclosure  sale  by  the  bond- 
holders' committee  for  $61,500,000,  which  was  $86,000,000  less 
than  the  secured  debts.  It  was  transferred  immediately  to  a 
new  corporation  which  issued  the  $345,000,000  of  securities 
contemplated  by  the  Plan,  and  the  old  stockholders,  most  of 

1  Paton  v.  Northern  Pacific  Ry.  Co.,  85  Fed.  838 ;    1896. 


REORGANIZATION   OF   CORPORATIONS  193 

whom  paid  the  assessment,  became  the  owners  of  the  bulk  of 
the  stock  of  the  new  company. 

About  ten  years  after  the  consummation  of  this  reorganiza- 
tion, the  new  Northern  Pacific  Company  having  in  the  mean- 
time become  highly  prosperous,  Boyd,  the  owner  of  a  judgment 
for  an  unsecured  claim  against  the  old  company,  brought  a 
suit  against  the  old  company  and  the  new  company,  seeking  to 
subject  the  property  acquired  by  the  latter  from  the  former 
at  foreclosure  sale  to  the  payment  of  his  judgment.  He  claimed 
that  the  foreclosure  sale  was  invalid  because  it  was  made  in 
pursuance  of  a  Plan  of  Reorganization  between  bondholders 
and  stockholders  of  the  railroad  company  which  made  no  pro- 
vision for  the  payment  of  the  unsecured  creditors,  although  the 
stockholders  retained  their  interest  by  receiving  shares  in  the 
new  Company.  The  Court  below  sustained  this  contention 
and  entered  a  decree  making  Boyd's  claim  a  lien  upon  the 
property  of  the  old  company  in  the  hands  of  the  new  company 
but  subject  to  the  mortgages  placed  thereon  at  the  time  of  the 
reorganization.  The  Supreme  Court,  by  a  vote  of  five  to  four, 
affirmed  the  judgment,  the  dissenters  being  Chief  Justice  White 
and  Justices  Lurton,  Holmes  and  Van  Devanter. 

The  opinion  of  the  majority  of  the  Court  proceeds  upon  the 
theory  that  while  the  bondholders  might  have  lawfully  bought 
in  the  property  covered  by  the  mortgage  and  kept  it  for  them- 
selves to  the  exclusion  of  both  the  unsecured  debt  and  the 
stockholders,  the  moment  they  provided  for  participation  in 
the  new  company  by  the  stockholders,  even  at  the  price  of 
paying  a  heavy  assessment,  the  obligation  arose  to  make  pro- 
vision for  the  unsecured  debt  which  would  recognize  its  priority 
to  the  interest  of  the  stockholders. 

The  prevailing  opinion  says  (p.  504) : 

"The  property  was  a  trust  fund  charged  primarily  with  the  pay- 
ment of  corporate  liabilities.  Any  device,  whether  by  private  con- 
tract or  judicial  sale  under  consent  decree,  whereby  stockholders  were 
preferred  before  the  creditor  was  invalid.  Being  bound  for  the  debts, 


194     REORGANIZATION  OF  CORPORATIONS 

the  purchase  of  their  property,  by  their  new  company,  for  their  bene- 
fit, put  the  stockholders  in  the  position  of  a  mortgagor  buying  at  his 
own  sale.  .  .  .  That  such  a  sale  would  be  void,  even  in  the  absence 
of  fraud  in  the  decree,  appears  from  the  reasoning  in  Louisville  Trust 
Company  v.  Louisville  Ry.,  174  U.  S.  674,  683,  684  (the  Monon  case) 
where  'assuming  that  foreclosure  proceedings  may  be  carried  on  to 
some  extent  at  least  in  the  interests  and  for  the  benefit  of  both  mort- 
gagee and  mortgagor  (that  is,  bondholder  and  stockholder) '  the  court 
said  that  'no  such  proceedings  can  be  rightfully  carried  to  consum- 
mation which  recognize  and  preserve  any  interest  in  the  stockholders 
without  also  recognizing  and  preserving  the  interests,  not  merely  of 
the  mortgagee,  but  of  every  creditor  of  the  corporation.  .  .  .  Any 
arrangement  of  the  parties  by  which  the  subordinate  rights  and  in- 
terests of  the  stockholders  are  attempted  to  be  secured  at  the  expense 
of  the  prior  rights  of  either  class  of  creditors  comes  within  judicial 
denunciation.' " 

The  Court  then  says  (p.  507) : 

"The  invalidity  of  the  sale  flowed  from  the  character  of  the  re- 
organization agreement  regardless  of  the  value  of  the  property,  for  in 
cases  like  this,  the  question  must  be  decided  according  to  a  fixed  prin- 
ciple, not  leaving  the  rights  of  the  creditors  to  depend  upon  the 
balancing  of  evidence  as  to  whether  on  the  day  of  sale  the  property 
was  insufficient  to  pay  prior  encumbrances." 

The  Court  continues  (p.  508) : 

"This  conclusion  does  not,  as  claimed,  require  the  impossible  and 
make  it  necessary  to  pay  an  unsecured  creditor  in  cash  as  a  condition 
of  stockholders  retaining  an  interest  in  the  reorganized  company. 
His  interest  can  be  preserved  by  the  issuance,  on  equitable  terms,  of 
income  bonds  or  preferred  stock.  If  he  declines  a  fan*  offer  he  is  left 
to  protect  himself  as  any  other  creditor  of  a  judgment  debtor,  and, 
having  refused  to  come  into  a  just  reorganization,  could  not  there- 
after be  heard  in  a  court  of  equity  to  attack  it." 

This  is  the  one  hint  which  the  Court  vouchsafes  as  to"  the 
procedure  which  should  be  adopted  in  providing  for  unsecured 
debts  under  Plans  of  Reorganization  based  on  the  foreclosure 
of  a  mortgage  but  offering  participation  to  stockholders. 


REORGANIZATION  OF  CORPORATIONS     195 

Mr.  Justice  Lurton  was  right  when  he  said  in  his  dissenting 
opinion,  that  "The  consequences  which  may  result  from  the 
decision  to  the  numerous  reorganizations  of  railroad  companies 
which  occurred  about  the  time  of  this  reorganization  or  since, 
are  to  my  mind  alarming." 

The  result  of  this  decision  has  been  to  introduce  the  greatest 
uncertainty  and  confusion  in  the  reorganizations  which  have 
since  been  attempted  and  those  which  are  now  pending.  It 
has  materially  reduced  the  opportunities  for  stockholders  to 
participate  in  reorganizations  controlled  by  mortgage  bond- 
holders, for,  manifestly,  the  simplest  way  for  a  committee  of 
mortgage  bondholders  to  avoid  the  embarrassments  of  the 
Boyd 1  case  is  completely  to  exclude  the  stockholders  and 
thereby  gain  freedom  to  exclude  the  unsecured  debt.  But 
still,  in  most  large  reorganizations,  the  stockholders  knock 
loudly  at  the  door  for  participation,  and  it  is  still  the  prefer- 
ence of  most  bondholders'  committees  to  afford  them  partici- 
pation, partly  to  avoid  the  dissatisfaction,  litigation  and  delay 
which  might  result  from  their  exclusion,  and  partly  to  secure 
new  capital  by  appealing  to  the  desire  of  stockholders  to  retain 
their  interest  in  the  property  and  their  consequent  willingness 
to  furnish  new  capital  on  more  favorable  terms  than  could  be 
obtained  from  strangers. 

Naturally  bondholders'  committees  are  usually  unwilling  to 
admit  stockholders  upon  a  basis  which  will  involve  the  pay- 
ment of  the  unsecured  creditors  in  cash.  Therefore  some  offer 
of  securities  meeting  the  requirements  of  the  Boyd 1  case  must 
be  made.  This  consideration  is  of  special  importance  in  several 
pending  reorganizations  of  large  magnitude,  where  the  parent 
company  is  liable  as  guarantor  of  the  obligations  or  contracts 
of  subsidiary  or  affiliated  companies  the  properties  of  which 
are  to  be  excluded  from  the  reorganization.  In  such  cases 
there  may  be  an  enormous  unsecured  contingent  liability  which 
will  be  represented  by  no  value  whatever  in  the  reorganized 

1  See  ante. 


196     REORGANIZATION  OF  CORPORATIONS 

property.  The  decision  in  the  Boyd 1  case  gives  to  the 
holders  of  these  guaranteed  obligations  or  contracts  a  position 
of  unwarranted  strength.  They  can  say  to  the  committee 
representing  the  bondholders  of  the  parent  corporation,  un- 
less you  settle  with  us,  we  will  assert  our  rights  under  the 
Boyd 1  case  and  practically  force  you  to  exclude  your  stock- 
holders from  the  reorganization  and  thereby  deprive  you  of 
the  opportunity  of  raising  your  new  capital  by  assessing  them. 
In  some  cases  the  difficulty  has  been  met  by  an  agreement 
with  the  holder  of  the  large  unsecured  claims,  but  in  other 
cases  counsel  must  form  a  conclusion  as  to  what  provision 
for  the  unsecured  debt  will  meet  the  requirements  of  the 
Boyd 1  case. 

It  will  be  remembered  that  in  the  Boyd  l  case  the  Court  said 
that  the  decision  does  not  "make  it  necessary  to  pay  an  un- 
secured creditor  in  cash  as  a  condition  of  stockholders  retaining 
an  interest  in  the  reorganized  company/'  that  "his  interest  can 
be  preserved  by  the  issuance,  on  equitable  terms,  of  income 
bonds  or  preferred  stock,"  and  that  "if  he  declines  a  fair  offer 
.  .  .  and  having  refused  to  come  into  a  just  reorganization, 
he  could  not  thereafter  be  heard  in  a  court  of  equity  to  attack 
it."  This,  you  will  observe,  is  a  very  vague  guide.  It  would 
seem  reasonably  clear  that  the  opinion  would  be  met  by  offer- 
ing the  unsecured  creditor  par  in  income  bonds  or  preferred 
stock  which  would  be  prior  to  all  the  securities  of  the  new  com- 
pany appropriated  for  the  old  stockholders,  but  in  the  ordinary 
case  the  old  stockholders'  participation  is  conditioned  upon  his 
paying  a  cash  assessment  for  which  he  will  receive  a  preferred 
security  that  would  naturally  rank  ahead  of  the  preferred 
stock  or  income  bonds  appropriated  for  the  unsecured  creditors. 
The  opinion  says  he  must  be  offered  income  bonds  or  preferred 
stock  "on  equitable  terms."  Does  that  mean  that  they  may 
be  offered  at  less  than  par?  I  am  sure  that  no  one  can  tell. 
Apparently  the  opinion  leaves  it  for  the  court  to  determine  in 

1  See  ante. 


REORGANIZATION   OF   CORPORATIONS  197 

each  case  whether  or  not  the  terms  offered  to  the  floating  debt 
are  equitable. 

Mr.  Joline,  in  his  lecture  of  six  years  ago,  said  that 

"The  opinion  of  Justice  Brewer  in  the  Monon  case  stands  .  .  . 
upon  the  pages  of  the  reports,  a  dangerous  weapon  in  the  hands  of 
guerrillas  who  hang  about  the  outskirts  of  reorganizations  and  en- 
deavbr  to  levy  tribute  as  a  condition  of  abating  the  nuisance  of  their 
presence,  and  that  even  to  this  day,  reorganizes  stand  in  more  or  less 
terror  of  the  Monon l  case,  and  it  looms  up  as  a  perpetual  spectre  in 
their  path." 

If  this  were  true  of  the  Monon  1  case,  may  we  not  say  that  the 
specter  of  six  years  ago  has  now  become  materialized  into  a 
veritable  demon  incarnate  standing  across  the  path  of  the  re- 
organizer  to-day?  It  must  earnestly  be  hoped  that  before 
long  the  Supreme  Court  will  have  an  opportunity  of  handing 
down  a  decision  which  will  supplement  its  decision  in  the  Boyd 
case  by  indicating  some  fixed  principles  to  be  applied  in  making 
provision  for  the  floating  debt  in  reorganizations  based  upon 
the  foreclosure  of  mortgages  which  offer  participation  to  stock- 
holders. 

The  Boyd 2  case  has  been  construed  by  the  Federal  Courts  In 
several  adjudicated  cases,  but  none  of  them  are  of  material  aid.3 
It  had  been  the  hope  of  the  Bar  that  in  the  case  of  the  Kansas 
City  Southern  Railway  Company  v.  Guardian  Trust  Company, 
et  al.,  argued  at  the  October  Term,  the  Supreme  Court  would 
hand  down  a  decision  limiting  the  doctrine  of  the  Boyd  4  case 
or  at  all  events  laying  down  rules  which  would  serve  as  a  guide 
to  counsel,  but  to  their  disappointment  the  opinion  of  Mr. 
Justice  Holmes,  handed  down  last  week,  concurred  in  by  all  of 

i  See  ante.  *  Ibid. 

3  Keech  v.  Stowe-Fuller  Co.,  205  Fed.  887  ;  1913 ;  Mechanics  &  Metals  Nat. 
Bank  v.  Howell,  207  Fed.  973  ;  1913 ;  Central  Improvement  Co.  v.  Cambria  Steel 
Co.,  210  Fed.  696;  1913;  Investment  Registry  v.  Chicago  &  M.  E.  R.  Co.,  212 
Fed.  594  ;  1913 ;  In  re  Howell,  215  Fed.  1 ;  1914 ;  Equitable  Tr.  Co.  v.  United 
Box  Board  &  Paper  Co.,  220  Fed.  714;  1915;  Western  Union  Tel.  Co.  v.  U.  S. 
&  Mexican  Trust  Co.,  221  Fed.  545 ;  1915. 

*  See  ante. 


198  REORGANIZATION   OF   CORPORATIONS 

his  associates  excepting  the  Chief  Justice  and  Mr.  Justice  Van 
Devanter,  seems  only  to  .add  to  the  uncertainty.  In  that  case 
there  was  a  bondholders'  reorganization  based  upon  the  fore- 
closure of  their  mortgage.  Although  the  Plan  reserved  a  certain 
amount  of  cash  for  the  payment  of  the  floating  debt  —  which 
turned  out  to  be  very  largely  in  excess  of  that  amount,  —  it  did 
not  definitely  provide  that  the  floating  debt  should  all  be  paid 
but  left  it  to  the  Reorganization  Committee  to  determine 
whether  and  to  what  extent  the  cash  so  reserved  should  be  used 
for  that  purpose.  The  Reorganization  Committee  paid  a  large 
number  of  the  floating  debt  creditors,  but  not  the  complainant. 
The  Court  held  that  the  provision  in  the  Plan  for  the  floating 
debt  was  inadequate,  and  that  inasmuch  as  the  Plan  had  ad- 
mitted the  stockholders,  the  New  Company  was  liable  for  the 
debt  of  the  complainant.  The  only  new  light  shed  by  this  de- 
cision is  in  the  suggestion  that  if,  in  a  given  case,  floating  debt 
creditors  are  to  be  preferred  to  stockholders  "it  is  essential  to 
inquire  whether  the  appellant  (the  New  Company)  .  .  .  got 
by  the  foreclosure  more  than  enough  to  satisfy  the  mortgage, 
which  was  a  paramount  lien."  In  the  Boyd 1  case  the  Court,  on 
the  contrary,  said  that  "the  invalidity  of  the  sale  flowed  from 
the  character  of  the  reorganization  agreement  regardless  of  the 
value  of  the  property,  ..."  and  later  in  the  opinion  it  seemed 
to  assume  that,  whatever  may  have  been  the  actual  value  of 
the  property,  the  New  Company  was  concluded  by  the  esti- 
mate of  value  upon  which  its  issue  of  new  securities  was  based. 
The  recent  decision  accordingly  affords  some  hope  that  mort- 
gage bondholders  could  carry  through  a  Plan  of  Reorganization 
which  admitted  the  stock  and  excluded  the  floating  debt  pro- 
vided it  could  be  shown  that  the  value  of  the  property  did  not 
exceed  the  mortgage  lien,  and  provided  also,  possibly,  that  the 
new  securities  were  based  upon  a  valuation  of  the  property 
which  did  not  exceed  that  amount. 

1  See  ante. 


REORGANIZATION   OF   CORPORATIONS  199 

The  Underwriting  and  Syndicate  Agreements 

Having  completed  the  Plan  and  Agreement  of  Reorganiza- 
tion, the  next  important  paper  is  the  underwriting  agreement. 
The  parties  to  that  are  usually  the  reorganization  committee 
or  the  reorganization  managers  on  the  one  hand  and  the  under- 
writing Syndicate  or,  more  frequently,  the  Syndicate  managers, 
on  the  other  hand.  It  may  be  a  very  simple  contract.  Not 
infrequently  an  underwriting  agreement  creating  an  obligation 
running  into  tens  of  millions  is  expressed  in  a  letter  less  than 
a  page  long.  The  agreement  should  refer  to  the  Plan  and  Agree- 
ment of  Reorganization,  and  provide  that  the  Syndicate  or 
Syndicate  Managers  shall,  for  a  designated  commission,  agree 
to  purchase  such  of  the  securities  offered  to  the  security  holders 
whose  participation  is  underwritten  as  shall  not  be  subscribed 
for  by  them,  paying  therefor  the  amount  of  the  so-called 
assessment  and  receiving  all  of  the  securities  which  would  have 
gone  to  the  non-assenting  security  holders  had  they  joined  in 
the  Plan. 

If  your  client,  the  bankers,  happens  to  be  the  Syndicate 
Manager,  it  will  also  be  your  duty  to  draw  the  syndicate  agree- 
ment, that  is,  the  agreement  between  the  Syndicate  Managers 
and  the  participants  in  the  Syndicate.  This  agreement  also 
is  sometimes  embodied  in  a  short  letter,  addressed  by  the  Syn- 
dicate Managers  to  each  participant  and  accepted  by  him,  but 
more  frequently,  particularly  in  the  case  of  large  syndicates 
with  numerous  participants,  a  more  formal  instrument  is  em- 
ployed. Such  an  agreement  confers  upon  the  Syndicate 
Managers  power  to  bind  the  participants  within  the  limit  of 
the  maximum  syndicate  obligation.  It  should  provide  that 
the  liability  of  the  Syndicate's  subscribers  shall  be  several  and 
not  joint  and  that  the  securities  acquired  for  syndicate 
account  may  remain  for  a  designated  period  under  the  control 
and  management  of  the  Syndicate  Managers  and  sometimes, 
but  not  always,  with  the  privilege  to  participants  to  withdraw 


200  REORGANIZATION   OF  CORPORATIONS 

their  securities  from  sale.  The  agreement  should  confer  broad 
powers  upon  the  Syndicate  Managers  to  take  such  action  in 
their  discretion  as  they  shall  deem  to  be  advantageous  in  the 
interest  of  the  Syndicate.  It  is  wise  to  provide  that  the  Syndi- 
cate participations  shall  not  be  transferable  except  with  the 
permission  of  the  Syndicate  Managers. 

Consummation  of  the  Plan 

The  Plan  and  Agreement  of  Reorganization  having  been 
adopted  and  signed  on  behalf  of  the  committees  and  filed  with 
the  depositary,  you  next  publish,  in  such  newspapers  and  at 
such  intervals  as  are  designated  in  the  Protective  Agreement, 
the  notice  of  the  filing  of  the  Plan,  affording  to  depositors  the 
privilege  of  withdrawing  their  securities  in  case  they  are  dis- 
satisfied with  the  Plan  and  to  holders  of  undeposited  securities 
the  opportunity  of  depositing  their  securities  under  the  Plan. 
The  time  for  such  additional  deposits  may  be  extended  from 
time  to  time,  with  or  without  the  payment  of  a  penalty,  until 
the  Committee  is  satisfied  that  a  sufficient  proportion  of  the 
various  classes  of  securities  has  been  deposited  to  justify  it  in 
declaring  the  Plan  operative.  Its  action  in  declaring  the  Plan 
operative  usually  consists  of  resolutions  adopted,  or  an  instru- 
ment signed,  by  its  members  which  is  filed  with  the  depositary, 
and  of  notice  given  by  publication  as  provided  in  the  Agree- 
ment. Even  after  the  Plan  has  been  declared  operative, 
further  opportunity  for  the  deposit  of  securities  may  be,  and 
usually  is,  offered. 

It  is  usually  wise  to  advise  your  client  to  adopt  a  liberal 
policy  in  accepting  deposits  of  securities  and  to  avoid  forcing 
minorities  to  fight  by  excluding  them  from  participation  in  the 
Plan,  however  undeserving  they  may  seem  to  be.  The  under- 
writing agreement  and  the  syndicate  agreement  should  clearly 
provide  that,  with  or  without  the  consent  of  the  Syndicate 
Managers,  preferably  without,  the  Reorganization  Committee 


REORGANIZATION   OF   CORPORATIONS  201 

may  permit  delinquent  security  holders  to  participate  in  the 
Plan  even  after  the  date  when  under  the  terms  of  the  under- 
writing agreement  the  Syndicate  becomes  entitled  to  receive 
the  securities  which  would  have  gone  to  the  non-assenting 
security  holders  had  they  participated  in  the  Plan.  Without 
such  a  provision,  the  rights  of  the  Syndicate  in  respect  of  these 
securities  would  become  fixed  and  the  Reorganization  Com- 
mittee, and  even  the  Syndicate  Managers,  would  be  powerless 
to  appropriate  any  of  the  securities  to  the  delinquent  depositors. 
The  action  of  the  Committee  in  declaring  the  Plan  opera- 
tive does  not  mean  that  the  Plan  has  been  executed,  or  even 
that  it  can  be  executed  immediately.  It  simply  means  that 
the  Syndicate  is  bound  and  that  the  Committee  has  deter- 
mined to  proceed  with  its  effort  to  carry  the  Plan  into  execu- 
tion. Even  after  the  Plan  has  been  declared  operative,  it 
may  be  modified  or  abandoned  by  action  taken  pursuant  to 
the  agreement.  Reorganizations  cannot  be  carried  through 
over  night.  It  usually  takes  from  one  to  three  years  from  the 
date  of  default  to  carry  an  important  railroad  system  through 
reorganization.  At  the  time  that  the  Plan  is  declared  opera- 
tive your  trustee  may  not  have  procured  the  foreclosure  decree 
and  almost  certainly  the  foreclosure  sale  will  not  have  taken 
place.  It  is  very  desirable  that  you  should  have  obtained  your 
foreclosure  decree  before  the  adoption  of  the  Plan  because 
then  there  will  be  much  less  opportunity  for  obstruction  and  less 
basis  for  a  court  holding,  as  it  was  held  in  the  Boyd1  case, 
that  the  decree  was  in  effect  a  consent  decree,  inasmuch  as  the 
stockholders,  by  agreeing  in  advance  to  a  Plan  of  Reorganiza- 
tion, had  lost  all  incentive  to  oppose  the  entry  of  the  decree. 
Much  can  be  said  in  favor  of  the  view  that  the  doctrine  of  the 
Boyd  1  decision  would  not  apply  to  a  case  where  bondholders 
had  obtained  their  decree  without  the  assistance  of  stock- 
holders, particularly  if  it  had  been  obtained  in  the  face  of  their 
active  opposition. 

1  See  ante. 


202  REORGANIZATION   OF   CORPORATIONS 

An  important  problem  in  connection  with  the  entry  of  the 
foreclosure  decree  is  the  fixing  of  the  upset  price.  It  should 
be  sufficiently  high  not  to  be  unfair  to  non-assenting  bond- 
holders but  sufficiently  low  so  that  the  distributive  share  of 
the  proceeds  of  sale  payable  to  the  non-assenting  bondholders 
is  not  so  large  as  to  impose  a  serious  burden  upon  the  reorgani- 
zers  or  encourage  bondholders  to  refrain  from  participating  in 
the  Plan.  If  there  is  a  large  amount  of  junior  debt  not  pro- 
vided for  in  the  Reorganization  you  will  naturally  be  interested 
in  keeping  down  the  price  to  be  paid  for  the  mortgaged  property 
in  order  that  there  may  be  as  large  a  deficiency  judgment  as 
possible  to  share  with  the  junior  debt  in  the  distribution  of  the 
unmortgaged  assets.  Reorganizations  have  sometimes  been 
held  up  for  months,  even  years,  because  the  Court  upon  its 
own  motion  or  at  the  instance  of  non-assenting  bondholders, 
unsecured  creditors  or  stockholders  has  fixed  so  high  an  upset 
price  that  the  reorganizers  were  unwilling  to  provide  the  cash 
which  would  go  to  the  non-assenting  bondholders  or  others  in 
case  that  upset  price  were  paid.  An  effort  to  secure  an  in- 
ordinately high  upset  price  is  one  of  the  favorite  devices  of 
those  who  seek  to  delay  reorganizations  either  from  good 
motives  or  bad. 

You  have  now  reached  the  stage  when  the  professional 
obstructor  is  most  likely  to  appear,  if  he  has  not  already  ap- 
peared. I  was  going  to  call  him  the  professional  striker,  but 
that  would  hardly  be  fair,  because  the  small  security  holder 
who  seeks  to  obstruct  a  reorganization  is  not  always  a  striker, 
by  which  I  mean  a  person  who  seeks  by  creating  a  nuisance 
value  for  himself  to  force  the  payment  of  an  amount  wholly 
disproportionate  to  his  interest  in  the  property  as  the  price  of 
the  withdrawal  of  the  nuisance  of  his  presence.  There  are  a 
certain  number  of  men  who  make  it  a  profession  to  watch 
reorganizations  and  other  large  corporate  transactions  with  a 
view  to  instituting  litigation  at  some  critical  moment  in  the 
hope  of  creating  a  nuisance  value  for  themselves.  On  the 


REORGANIZATION   OF   CORPORATIONS  203 

other  hand,  among  the  thousands  of  security  holders  affected 
by  an  important  reorganization  there  are  very  apt  to  be  men 
who,  through  vanity,  personal  spite,  stubbornness  or  mere 
fondness  for  opposition,  are  disposed  to  be  diligent  in  hunting 
for  an  opportunity  to  oppose  the  plans  of  the  majority  and 
who  have  no  ambition  to  be  bought  off.  Opposition  may  come 
also  from  security  holders  who  are  sincerely  opposed  to  the 
Plan  from  honorable  motives. 

Courts  often  seem  inclined  to  favor  small  minorities  upon 
the  theory  that  for  some  reason  they  should  be  protected  against 
the  assumed  oppression  of  the  majority.  Our  own  Court  of 
Appeals  has  been  particularly  critical  of  reorganizations  and 
diligent  in  protecting  minorities.1  My  own  observation  leads 
me  to  the  opinion  that  most  cases  of  oppression  in  reorganiza- 
zations  are  not  cases  where  the  majority  seek  to  oppress  the 
minority  but  where  the  minority  become  the  oppressors  by 
seeking  to  hold  up  or  delay  the  plans  of  the  majority.  Plans 
of  reorganization  are  usually  fair  and  any  plan  must  give  all 
security  holders  of  the  same  class  an  equal  opportunity  to  par- 
ticipate. Most  of  the  outcry  against  the  unfairness  of  re- 
organizations comes  from  people  who  for  selfish  purposes  seek 
an  advantage  out  of  proportion  to  their  interest  in  the  property. 

If  there  is  a  weak  place  in  your  armor,  some  critic  is  very 
apt  to  find  it  out,  and  even  where  there  is  none,  the  amount 
of  expense,  trouble  and  delay  which  the  holder  of  a  small 
amount  of  securities  may  cause  by  vigorous  litigation  is  astound- 
ing. If  his  motive  is  a  corrupt  one,  he  is  very  apt  to  enter  the 
arena  at  the  most  critical  stage  of  your  plans  when,  perhaps 
because  of  favorable  market  conditions,  your  clients  have 
chosen  to  launch  their  reorganization  and  when  even  a  month's 
delay  may  bring  failure  although  at  the  moment  success  seems 
assured.  It  may  be  that  the  underwriting  syndicate  is  only 

1  See  United  States  Water  Works  Company,  Limited  v.  The  Omaha  Water  Co., 
164  N.  Y.  41 ;  1900,  ante;  Industrial  &  Trust  Co.  v.  Todd,  180  N.  Y.  215  ;  1905, 
ante;  and  Cox  v.  Stokes,  156  N.  Y.  491 ;  1898. 


204  REORGANIZATION   OF  CORPORATIONS 

bound  for  a  limited  period  and  that  it  will  be  released  in  case 
the  action  of  the  security  holders  is  delayed  beyond  that  period 
by  injunction  or  otherwise.  It  may  well  be  that  although  you 
feel  certain  of  ultimate  success  in  defeating  it,  the  attack  has 
been  so  timed  that  the  mere  delay  involved  in  meeting  it  will 
imperil,  if  not  defeat,  your  client's  plans.  You  may  find  your- 
self in  such  a  predicament,  although  you  have  taken  every  con- 
ceivable precaution  to  guard  against  it,  and  then  you  have  to 
face  the  hardest  problem  with  which  counsel  in  reorganizations 
and  large  corporate  transactions  have  to  deal,  and  that  is, 
shall  you  advise  your  client  to  fight  or  to  settle.  Your  instinct 
will  doubtless  be  to  fight,  but,  fortunately  for  your  peace  of 
mind,  when  you  have  given  your  advice  your  client  will  prob- 
ably take  the  decision  into  his  own  hands. 

The  Plan  having  been  declared  operative,  you  are  in  a  posi- 
tion to  determine  whether  the  amounts  of  cash  paid  in  by  the 
assenting  security  holders  are  sufficient  for  the  requirements 
of  the  purchase  and  the  other  cash  requirements  which  must 
be  met  prior  to  the  organization  of  the  new  company.  If  not, 
the  Syndicate  must  be  called  upon  to  pay  in  the  required 
amount  of  cash  to  be  held  subject  to  the  order  of  the  Com- 
mittee. 

At  the  foreclosure  sale  the  bidder  for  the  Committee  is 
usually  a  subcommittee  designated  a  "purchasing  committee/* 
The  subcommittee  must  be  armed  with  instructions  from  the 
Committee  as  to  how  high  it  shall  bid  in  case  there  are  rival 
bidders.  Counsel  who  have  acted  frequently  for  reorganiza- 
tion committees  have  spent  a  great  many  anxious  hours  pre- 
paring for  the  unexpected  bidder,  but  in  my  own  experience 
he  has  never  appeared.  The  reason  for  this,  of  course,  is  that 
the  Committee  can  pay  the  major  part  of  the  purchase  price 
by  surrendering  bonds,  while  a  rival  bidder,  unless  it  be  a  rival 
bondholders'  committee,  must  pay  in  cash.  Manifestly  in  most 
sales  where  the  security  holders  interested  in  the  sale  have 
combined  and  placed  then*  interest  in  the  hands  of  a 


REORGANIZATION   OF   CORPORATIONS  205 

committee  there  is  not  likely  to  be  serious  competition  at 
the  sale.  As  a  protection  against  bogus  or  holdup  bids  see 
to  it  that  the  decree  requires  a  substantial  deposit  to  qualify 
bidders. 

In  order  to  secure  a  reasonably  prompt  sale,  it  is  often  neces- 
sary to  defer  the  determination  of  many  questions  relating  to 
the  relative  priorities  of  claimants  until  the  distribution  of  the 
proceeds  of  sale.  Such  a  course  may  mean  that  the  value  at 
which  your  Committee's  bonds  will  be  received  in  payment  of 
the  purchase  price  will  be  less  than  what  you  deem  to  be  their 
ultimate  interest  in  the  distribution  of  the  proceeds  of  sale. 
Usually  this  does  not  increase  the  amount  of  actual  cash  re- 
quired to  be  paid  by  the  Committee  at  the  time  of  sale,  be- 
cause of  the  convenient  practice  of  inserting  in  the  decree  a 
provision  that  even  after  the  confirmation  of  the  sale  the  court 
shall  retain  jurisdiction  for  the  purpose  of  enforcing  the  pay- 
ment of  the  purchase  price.  Courts  are  therefore  lenient  in 
permitting  purchasing  committees  to  take  possession  of  the 
property  even  though  there  is  a  chance  that  it  may  be  subse- 
quently determined  that  further  payments  are  required  upon 
the  purchase  price.1 

Special  care  must  be  exercised  that  the  sale  is  conducted 
fairly  and  in  strict  compliance  with  the  decree  and  the  pub- 
lished terms  of  sale  and  that  no  basis  is  offered  for  a  successful 
attack  upon  the  sale,  particularly  if  there  is  a  substantial 
amount  of  non-assenting  bonds.  It  is  well  settled  that  the 
mere  fact  that  the  security  holders  have  combined  to  bid  at 
the  sale  is  not  a  ground  for  setting  it  aside.2  Courts  are  not 
disposed  to  set  aside  sales  where  there  was  a  fair  opportunity 
for  outside  bidders  and  no  fraud  or  irregularity  can  be  shown. 

The  sale  having  been  confirmed  by  the  Court,  the  Master 
is  ready  to  deliver  his  deed,  which  may  either  be  to  the  pur- 

1  Short  on  Railway  Bonds  and  Mortgages,  p.  733 ;    1897 ;     First  National 
Bank  of  Cleveland  v.  Shedd,  121  U.  S.  74  ;   1887. 

2  Robinson  v.  Iron  Railway  Co.,  135  U.  S.  522  ;    1890. 


206  REORGANIZATION   OF   CORPORATIONS 

chasing  committee,  or,  upon  its  order,  to  the  new  company 
which  has  been  organized  with  authority  to  issue  the  securities 
contemplated  by  the  Plan. 

Having  applied  the  proceeds  of  sale  to  your  bonds,  you 
should  then  see  to  the  entry  by  the  Trustee  of  the  deficiency 
judgment  which  will  participate  with  the  unsecured  debt  in 
the  distribution  of  the  proceeds  of  the  unmortgaged  assets. 
The  deficiency  judgment  is  usually  a  relatively  unimportant 
factor  in  railroad  reorganizations  because  the  amount  of  un- 
mortgaged assets  is  generally  small,  but  it  is  often  highly 
important  in  the  reorganization  of  an  industrial  corporation 
inasmuch  as  a  very  large  proportion  of  its  property,  including 
current  assets,  is  usually  not  covered  by  the  mortgage. 

One  of  the  most  important  questions  you  have  to  decide  is 
as  to  the  State  in  which  to  incorporate  the  new  company. 
If  it  is  a  railroad  company  you  can  usually  choose  any  of  the 
States  through  which  its  lines  run.  Your  choice  will  be  in- 
fluenced by  a  great  variety  of  considerations  such  as  the  rela- 
tive liberality  of  the  corporation  laws  of  the  various  States 
and  the  powers  and  policy  of  their  public  service  commissions. 
The  latter  consideration  is  especially  important  if  the  only 
securities  to  be  issued  by  the  new  company  are  shares  of  stock, 
for  probably  in  that  case  the  only  public  service  commission 
you  will  have  to  consult  with  will  be  that  of  the  State  of  in- 
corporation, but,  as  I  have  already  pointed  out,  if  the  reor- 
ganization contemplates  an  issue  of  mortgage  bonds,  you  will 
probably  have  to  secure  the  approval  of  the  mortgage  by  the 
public  service  commission  of  each  State  in  which  the  lines  to  be 
mortgaged  extend.  In  the  case  of  railroad  reorganizations,  it  is 
sometimes  necessary  to  organize  a  separate  corporation  to  hold 
the  property  in  a  particular  State  because  the  laws  of  that 
State  forbid  foreign  corporations  to  acquire  railroads  within 
that  State.  As  a  rule,  the  separate  corporations  thus  formed 
are  ultimately  consolidated  and  you  then  create  that  hydra- 
headed  monster,  a  consolidated  corporation  of  two  or  more 


REORGANIZATION   OF   CORPORATIONS  207 

States.  Many  States,  including  New  York,1  provide  special 
statutes  for  the  organization  of  corporations  to  carry  out  re- 
organizations. 

The  Reorganization  Committee  not  only  causes  the  pur- 
chasing committee,  or  the  Master,  to  deed  the  purchased 
property  to  the  new  company,  but  turns  over  to  it  all  unpaid 
subscriptions  for  new  securities  and  all  the  cash  in  its  hands 
except  such  as  it  requires  for  its  expenses.  It  is  also  usual  to 
turn  over  to  the  new  company  all  of  the  deposited  securities 
to  serve  as  muniments  of  title  in  case  any  question  should  sub- 
sequently develop  as  to  the  Company's  title  to  the  property 
acquired  from  the  committee. 

The  new  company,  besides  issuing  to  the  Committee  the 
new  securities  required  by  the  Plan,  should  approve  the  Com- 
mittee's compensation  and  expenses  and  assume  its  liabilities 
so  that  the  Committee  may  be  discharged  of  any  further  re- 
sponsibility respecting  the  reorganization  to  others  than  its 
depositors. 

The  Committee  should  now  publish  notice  that  the  new 
securities  are  ready  for  distribution  and  that  each  depositor 
may  receive  his  share  of  the  new  securities  upon  surrendering 
to  the  depositary  his  certificate  of  deposit  endorsed  in  blank 
and  making  the  final  payment  on  his  assessment,  if  it  has  not 
already  been  paid  in  full. 

It  is  desirable  that  definitive  engraved  certificates  should  be 
ready  for  distribution,  and  provision  for  this  should  be  made 
well  in  advance  as  the  engraving  requires  several  weeks, 
sometimes  several  months.  If  the  engraved  certificates  are 
not  ready,  temporary  printed  certificates  exchangeable  for 
engraved  certificates  may  be  distributed.  Resort  to  temporary 
certificates  should  be  avoided  if  possible,  because  of  the  addi- 
tional trouble  and  expense  involved  in  their  issue  and  ultimate 
exchange  for  definitive  certificates. 

1  Stock  Corporation  Law,  Sec.  9  et  seq.  (N.  Y.  Consolidated  Laws). 


208  REORGANIZATION   OF   CORPORATIONS 

Voting  Trusts 

Voting  trusts  are  usual  to  insure  control  for  a  period  of  time 
in  persons  chosen  by  the  reorganizers  so  that  there  may  be 
reasonable  assurance  of  adherence  to  the  policy  contemplated 
by  the  reorganization.  Ordinary  questions,  such  as  the  elec- 
tion of  directors,  are  usually  left  to  the  discretion  of  the  Voting 
Trustees,  but  it  is  usual  to  provide  that  questions  of  a  radical 
nature  such  as  the  sale  of  the  property,  the  increase  of  the  capi- 
tal stock  and  the  creation  of  a  mortgage  shall  be  submitted  to 
the  holders  of  the  voting  trust  certificates  for  their  approval  or 
disapproval.  There  is  not  time  to  discuss  the  perplexing  ques- 
tions as  to  the  limits  within  which  voting  trusts  are  lawful. 
Suffice  it  to  say  that  it  is  usually  possible  to  create,  for  a  limited 
period,  an  effective  voting  trust  of  the  stock  issued  in  a  re- 
organization. In  New  York  voting  trusts  for  a  period  not 
exceeding  five  years  under  certain  limitations  are  expressly 
authorized  by  statute  1  and  it  is  customary  in  reorganizations 
centering  in  New  York  to  endeavor  to  comply  with  the  terms 
of  that  statute. 

General  Remarks 

In  tracing  the  proceedings  of  the  reorganization,  I  have,  for 
the  sake  of  simplicity  and  continuity,  assumed  that  you  have 
been  acting  as  counsel  for  a  Committee  representing  mortgage 
bonds  whose  position  was  such  as  to  dominate,  if  not  control, 
the  reorganization.  The  problems  presented  would  be  some- 
what different  if  you  were  acting  as  counsel  for  unsecured 
creditors  or  for  mortgage  bondholders  not  in  a  dominant  or 
controlling  position,  or  for  committees  representing  preferred 
or  common  stock. 

When  the  Plan  has  been  executed,  that  is,  when  your  com- 
mittee has  received  the  new  securities  and  cash,  and  not  until 
then,  I  am  sorry  to  say,  the  time  has  come  for  the  Committee 

1  General  Corporation  Law,  Sec.  25  (N.  Y.  Consolidated  Laws). 


REORGANIZATION   OF  CORPORATIONS  209 

to  pay  your  fee  and  also  to  pay  its  own  compensation  and  that 
of  the  depositaries  and  the  other  agents  which  have  been  em- 
ployed in  the  course  of  the  reorganization.  I  know  not  why, 
but  although  committees  are  willing  to  use  the  funds  under 
their  control  or  even  to  borrow  money  upon  the  pledge  of  the 
deposited  securities  for  almost  every  other  purpose,  from  time 
immemorial  it  has  been  the  custom  for  counsel  not  to  receive 
or  even  ask  for  their  fees  until  the  reorganization  has  been 
consummated  or  abandoned.  That  is  one  reason  why  the  fees 
paid  to  counsel  in  reorganizations  are  popularly  supposed  to 
be  much  higher  than  they  really  are.  A  fee  of  $100,000  to 
counsel  upon  the  consummation  of  a  successful  reorganization 
may  seem  high  to  one  who  does  not  realize  that  it  is  compen- 
sation for  two  or  even  three  or  four  years  of  perhaps  the  hardest 
work  and  the  gravest  responsibility  which  fall  to  a  lawyer's 
lot  and  that  there  are  few  departments  of  professional  activity 
where  experience,  familiarity  with  established  practices,  office 
organization  and  equipment  and  willingness  to  work  under 
pressure  without  regard  to  personal  convenience,  count  for  so 
much. 

READJUSTMENT  OF  THE  DEBT  OR  SHARE  CAPITAL  OF  CORPO- 
RATIONS  BECAUSE   OF   INSOLVENCY   OR   FINANCIAL   NEEDS 

OF  SOME  SORT  WHERE  THE  PROPERTY  is  NOT  TRANS- 
FERRED TO  A  NEW  CORPORATION 

In  these  cases  it  is  usually  necessary  to  start,  as  in  the  case 
of  the  other  class  of  reorganizations,  with  committees  and 
deposit  agreements  calling  for  the  deposit  of  the  various  classes 
of  securities  to  be  dealt  with,  because,  in  order  to  carry  through 
a  voluntary  readjustment,  it  is  necessary  that  the  power  to 
deal  with  the  securities  shall  be  concentrated  in  a  few  hands. 
Manifestly,  if  A  holds  the  entire  capital  stock  of  a  company, 
and  B  holds  its  entire  issue  of  mortgage  bonds,  and  C  holds 
its  entire  floating  debt,  those  three  men  could,  by  acting  together, 
make  practically  any  rearrangement  of  the  capitalization  they 


210  REORGANIZATION   OF   CORPORATIONS 

chose,  providing  no  rule  of  law  was  violated.  In  practice  it  is 
necessary  that  just  this  kind  of  control  should  be  brought 
about  by  the  deposit  of  the  outstanding  securities  with  one  or 
more  committees.  Sometimes  deposits  are  invited  before  a 
Plan  of  Readjustment  has  been  formulated,  and  in  that  event 
there  must  be  provision  for  the  promulgation  of  a  Plan,  and 
in  most  cases  there  should  also  be  provision,  such  as  we  have 
already  discussed  in  connection  with  reorganizations,  for  afford- 
ing to  depositors  an  opportunity  to  reject  the  Plan  and  with- 
draw their  securities.  Sometimes  a  Plan  of  Readjustment  is 
announced  at  the  outset  and  deposits  of  securities  under  that 
particular  Plan  are  invited. 

In  the  case  of  corporations  having  large  issues  of  widely 
scattered  securities,  it  is  often  necessary  that  the  Plan  and 
Agreement  should  be  so  drawn  that,  if  the  readjustment  can- 
not be  affected  by  the  voluntary  action  of  the  security  holders, 
it  may,  without  a  further  grant  of  power  from  the  depositors, 
be  effected  by  mortgage  foreclosure  or  other  enforcement  of 
the  rights  of  security  holders. 

A  voluntary  readjustment  may  be  preceded  by  a  receiver- 
ship, or  even  by  the  institution  of  foreclosure  proceedings,  for 
in  case  the  necessary  support  of  security  holders  eventually  is 
forthcoming,  the  receivership  can  be  dismissed,  or  the  fore- 
closure suit  abandoned.  Very  frequently,  a  receivership  or 
foreclosure  suit  furnishes  the  only  effective  means  of  convinc- 
ing the  security  holders  of  a  corporation  that  its  position  is 
such  that  cooperation  in  a  voluntary  reorganization  is  essential 
to  avert  the  loss  and  expense  incident  to  foreclosure  sale  or 
liquidation.  The  very  complex  reorganization  of  The  Balti- 
more and  Ohio  Railroad  Company  in  1899  was  finally  carried 
through  as  a  voluntary  reorganization,  although  foreclosure 
suits  had  been  instituted  and  the  property  was  in  the  hands  of 
receivers  for  over  three  years.  The  widely  scattered  securities 
finally  came  in  with  practical  unanimity  so  that  old  mortgages 
and  old  stock  issues  were  canceled,  new  bond  issues  and  new 


REORGANIZATION   OF   CORPORATIONS  211 

stock  issues  were  created,  the  old  securities  were  exchanged 
for  the  new,  and  thus  the  whole  financial  structure  of  the  cor- 
poration was  reconstructed. 

The  same  result  was  accomplished  in  the  reorganization  of 
the  Texas  and  Pacific  Company  in  1887,  where  the  foreclosure 
sale  actually  took  place  but  was  never  confirmed.  The  consent 
of  the  security  holders  finally  made  it  possible  to  cancel  the 
old  mortgages,  dismiss  the  foreclosure  proceedings,  create  new 
mortgages  and  issue  additional  stock,  thereby  preserving  the 
corporation's  Federal  charter. 

A  more  recent  and  somewhat  remarkable  instance  of  a  suc- 
cessful voluntary  readjustment  is  that  of  the  Hudson  &  Man- 
hattan Railroad  Company,  the  owner  of  the  so-called  Hudson 
Tubes  connecting  New  York  with  New  Jersey,  which  was  carried 
through  in  1913.  This  company  found  its  earnings  insufficient 
to  pay  the  interest  upon  its  $67,000,000  of  mortgage  bonds  which 
were  outstanding  and  widely  scattered.  Under  a  plan  for  the 
voluntary  readjustment  of  its  debt,  under  which  three  banking 
firms  acted  as  Readjustment  Managers,  and  without  court  pro- 
ceedings of  any  kind,  it  succeeded  in  securing  the  surrender  of 
practically  its  entire  bond  issue  in  exchange  for  new  first  mort- 
gage bonds  and  new  income  bonds,  half  and  half,  and  also 
secured  the  payment  of  a  cash  assessment  of  about  $3,800,000 
from  the  stockholders,  for  which  they  received  new  first  mort- 
gage bonds. 

Voluntary  reorganizations  are,  however,  comparatively  in- 
frequent in  the  case  of  railroad  companies.  The  business  of  a 
railroad  company  is  not  apt  to  suffer  seriously  from  a  receiver- 
ship. Indeed  a  railroad  often  emerges  from  foreclosure  and 
receivership  materially  strengthened  by  the  purging  process 
through  which  it  has  passed.  Not  so  with  the  average  indus- 
trial corporation,  whose  business,  goodwill  and  trade  position 
are  apt  to  be  shattered  by  the  effects  of  even  the  most  success- 
ful receivership  or  the  most  expeditious  foreclosure.  While  in 
the  case  of  a  railroad,  liquidation  is  usually  impossible,  if  the 


212     REORGANIZATION  OF  CORPORATIONS 

affairs  of  an  insolvent  industrial  corporation  once  get  into  the 
courts  there  is  always  the  danger  that  creditors  will  force 
liquidation,  preferring  the  cash  proceeds  of  liquidation  to  the 
securities  of  a  reorganized  company.  Consequently  sensible 
men,  in  dealing  with  an  insolvent  industrial  corporation,  make 
every  effort  to  accomplish  a  voluntary  readjustment,  and  the 
consequences  of  failure  are  so  serious  to  the  security  holders 
that  their  cooperation  is  much  more  likely  to  be  forthcoming 
than  in  the  case  of  an  insolvent  railroad. 

As  I  have  already  said,  the  purpose  of  an  agreement  provid- 
ing for  the  voluntary  readjustment  of  the  capital  and  debt  of  a 
corporation  is  to  concentrate  the  securities  in  one  hand  or  in 
a  few  hands,  so  that  the  necessary  changes  can  readily  be  ac- 
complished. It  is  rarely  possible,  however,  in  the  case  of  a 
corporation  with  considerable  amounts  of  widely  scattered 
securities  to  secure  literal  unanimity.  The  Readjustment 
Agreement  should,  therefore,  provide  that  the  Committee  or 
the  Readjustment  Managers  shall  have  discretion  to  determine 
when  the  deposited  securities  are  sufficient  in  amount  to  justify 
the  consummation  of  the  readjustment,  even  though  it  results 
in  preferential  treatment  for  the  security  holders  who  do  not 
assent  to  the  Plan.  For  instance,  if  the  holders  of  90  per  cent, 
of  the  bonds  assent  to  the  Plan,  it  may  be  necessary  to  use  part 
of  the  cash  produced  by  the  assessment  paid  by  the  assenting 
security  holders  to  pay  the  non-assenting  bonds  in  full.  In 
other  cases  it  may  be  necessary  to  grant,  in  effect,  a  preference 
to  non-assenting  stock.  Except  in  the  comparatively  rare  case 
of  redeemable  preferred  stock,  there  is  usually  no  way  in  a  vol- 
untary readjustment  by  which  the  status  of  stock  can  be  changed 
without  the  consent  of  its  holders,  so  that  it  becomes  necessary 
in  such  a  case  to  continue  the  non-assenting  stock  without  dis- 
turbing its  status  except  so  far  as  may  be  permitted  by  the 
exercise  of  the  powers  expressly  conferred  by  the  corporation's 
charter  or  by  the  statutes  subject  to  which  the  corporation  was 
organized.  In  all  these  cases  the  reorganizers  must  determine 


REORGANIZATION"  OF  CORPORATIONS     213 

whether  the  expense  and  practical  injustice  involved  in^thus 
preferring  the  non-assenting  securities  is  more  than  counter- 
balanced by  the  advantages  to  the  assenting  securities  which  will 
accrue  from  a  successful  consummation  of  the  readjustment  with- 
out the  expense  and  loss  incident  to  foreclosure  or  liquidation. 

A  receivership  in  the  Federal  courts,  such  as  we  considered 
in  discussing  reorganizations,  is  usually  the  most  serviceable 
means  of  preserving  the  property  pending  an  effort  to  carry 
through  a  voluntary  readjustment.  When  an  agreement  has 
been  reached  with  the  holders  of  the  entire  overdue  debt  or  of 
so  much  of  it  that  the  balance  can  be  paid  from  the  cash  which 
has  accumulated  in  the  hands  of  the  receiver  or  which  is  pro- 
vided by  the  assessment  upon  the  assenting  security  holders, 
the  receivership  can  be  lifted  and  the  property  restored  to  the 
corporation,  which  automatically  becomes  solvent  again.  It 
must  be  remembered,  however,  that  a  receivership  proceeding 
based  upon  a  creditor's  bill  is  a  proceeding  for  the  benefit  of 
all  creditors,  and  is  beyond  the  control  of  the  immediate  parties 
to  the  suit,  with  the  result  that  the  receivership  cannot  be  ter- 
minated unless  the  court  is  satisfied  that  the  Company  will  be 
solvent  and  that  all  the  creditors  holding  overdue  claims  have 
assented  or  that  adequate  provision  has  been  made  for  the 
payment  of  all  non-assenting  claims. 

Courts  of  equity,  particularly  the  Federal  courts,  will  go  very 
far  and  exercise  very  wide  powers  in  protecting  the  property 
and  business  of  an  industrial  corporation  where  there  appears 
to  be  a  reasonable  prospect  of  carrying  through  a  readjustment. 
They  will  authorize  their  receivers  to  continue  the  business  in 
the  regular  way,  to  extend  the  usual  credits  to  customers*,  to 
borrow  money,  to  carry  on  extensive  manufacturing  operations, 
to  improve  manufacturing  plants,  to  enter  into  contracts  in- 
volving large  commitments  running  over  considerable  periods 
of  time,  and  to  protect  the  assets  against  foreclosure  proceed- 
ings by  paying  interest  on  the  mortgage  debt.  There  is  no 
such  latitude  and  elasticity  in  statutory  receiverships  in  any 


214  REORGANIZATION   OF   CORPORATIONS 

State  with  which  I  am  familiar,  although,  as  now  conducted  by 
the  courts,  bankruptcy  proceedings  for  industrial  corporations 
are  by  no  means  hopeless.  As  I  have  already  explained  in  the 
case  of  industrial  corporations,  an  equity  receivership  is  no 
assurance  against  bankruptcy  proceedings,  and  a  threat  to 
institute  bankruptcy  proceedings  is  a  common  weapon  of  the 
creditor  who  seeks  to  create  a  nuisance  value  for  himself  at  the 
expense  of  those  who  are  endeavoring  to  effect  a  readjustment. 

In  dealing  with  creditors  in  voluntary  readjustments,  the 
principles  which  must  guide  you  are  comparatively  simple. 
If  the  creditors'  claims  are  overdue,  you  are  at  their  mercy  and 
you  must  either  pay  them  or  induce  them  to  accept  some 
security  in  satisfaction  of  their  claims.  This  of  course  is  wholly 
a  matter  of  agreement.  It  is  in  dealing  with  stock,  and  with 
the  rights  of  stockholders,  that  the  most  difficult  and  perplex- 
ing questions  are  apt  to  arise. 

In  issuing  stock  you  must  never  forget  that  the  corporation 
must  get  something  for  it  and  in  most  States  it  must  get  par 
value  in  money  or  in  money's  worth.  As  the  stock  of  a  corpora- 
tion which  is  in  financial  difficulty  usually  sells  much  below 
par,  its  unissued  stock,  or  to  speak  more  accurately,  its  capacity 
to  issue  additional  stock,  is  not  apt  to  be  of  much  use,  for  not 
even  the  unanimous  consent  of  stockholders  will,  as  against 
creditors,  legalize  the  issue  of  stock  which  is  not  fully  paid.1 

Therefore,  in  voluntary  readjustments  of  corporations  in 
financial  straits,  you  are  usually  compelled  to  resort  to  one  or 
both  of  two  devices,  if  you  intend  to  raise  money  by  the  sale  of 
stock.  The  first  is  to  create  preferred  stock,  which,  by  reason 
of  its  preference,  may  be  salable  at  par.  The  second  is  to 
secure  the  surrender  of  stock  already  outstanding,  which  being 
already  fully  paid,  can  be  sold  at  any  fair  price  that  the  com- 
pany may  fix.2  I  might  add  a  third  device,  namely,  that  of 

1  Goodnow  v.  American  Writing  Paper  C0./72  N.  J.  Eq.  645 ;    1907,  aff'd, 
73  N.  J.  Eq.  692. 

2  Lake  Superior  Iron  Co.  v.  Drexel  (1882),  90  N.  Y.  87 ;   1882;    Williams  v. 
Taylor,  120  N.  Y.  244 ;    1890. 


REORGANIZATION   OF   CORPORATIONS  215 

selling  obligations  at  a  large  discount,  accompanied  by  the  sale 
of  stock  at  par,1  but  there  are  difficulties  in  the  way  of  this 
device  which  usually  render  it  of  little  practical  value. 

The  statutes  of  many  of  the  States  expressly  provide  for  the 
creation  of  preferred  stock  by  the  vote  of  a  certain  proportion 
of  the  existing  stock,  and  in  such  a  case,  if  the  necessary  vote 
can  be  secured,  it  is  perfectly  simple  to  create  preferred  stock 
which  will  take  precedence  both  as  to  assets  and  dividends  over 
common  stock,  or,  in  some  cases,  a  new  preferred  stock  which 
will  take  precedence  over  preferred  stock  already  existing.  If 
you  can  thus  create  preferred  stock  and  sell  it  at  par,  the  prob- 
lem is  simple. 

Usually  where  the  statutes  of  a  State  do  not  specifically 
authorize  preferred  stock  it  can  be  created  by  contract  between 
the  stockholders  under  the  doctrine  of  the  decision  of  our  Court 
of  Appeals  in  the  case  of  Kent  v.  Quicksilver  Mining  Co.,2  but 
in  the  case  of  a  voluntary  readjustment  based  upon  this  prin- 
ciple it  is  necessary  to  secure  the  consent  of  the  holders  of  all 
the  outstanding  stock  unless  you  are  willing,  and  your  agree- 
ment permits,  that  the  rights  of  the  non-assenting  minority  in 
assets  and  dividends  should  not  be  disturbed  by  the  creation 
of  the  new  preferred  stock. 

In  dealing  with  preferred  stock  already  outstanding,  you 
can  usually  do  very  little  without  the  unanimous  consent  of  the 
stock  affected.  Without  that  consent  you  cannot  increase  or 
decrease  the  rate  of  dividends 3  or  impair  the  stockholders' 
right  to  arrears  of  dividends  4  but  can  sometimes,  as  I  have 
said,  create  a  prior  preferred  stock. 

Manifestly  the  second  of  the  expedients  I  have  suggested 
is  the  one  which  is  most  useful  and  it  is  the  one  most  frequently 
resorted  to,  that  is,  securing  the  surrender  of  outstanding  stock 
which,  being  fully  paid,  may  be  disposed  of  for  any  fair  con- 

1  See  Gamble  v.  Queens  Co.  Water  Co.,  123  N.  Y.  91 ;    1890. 

2  78  N.  Y.  159  ;  1879. 

8  Pronick  v.  Spirits  Distributing  Co.,  58  N.  J.  Eq.  97 ;    1899. 
4  Colgate  v.  United  States  Leather  Co.,  73  N.  J.  Eq.  72 ;    1907. 


216  REORGANIZATION   OF   CORPORATIONS 

sideration  without  regard  to  its  par  value.  Such  stock,  when 
surrendered  by  the  stockholders,  can  be  disposed  of  by  the  cor- 
poration itself  or  by  a  readjustment  committee,  can  be  sold  at 
any  fair  price  to  raise  cash,  can  be  given  as  a  bonus  with  the 
sale  of  unissued  stock  at  par  or  with  a  sale  of  obligations  at 
their  fair  market  value,  can  be  given  to  stockholders  in  return 
for  a  cash  assessment,  and  can  be  used  in  almost  any  other 
way  that  happens  to  fit  the  requirements  of  the  case.  It  may 
also  be  placed  in  the  treasury  of  the  company  for  subsequent 
sale. 

Voluntary  readjustments  of  capital  stock  may  sometimes  be 
accomplished  by  the  sale  of  the  corporation's  property  as  an 
entirety  under  statutes  or  charter  provisions  permitting  such 
sales  with  the  consent  of  a  certain  proportion  of  its  stockholders. 
Such  statutes  and  charter  provisions,  however,  are  usually  not 
of  great  practical  value  in  the  readjustment  of  the  capital  of 
corporations  in  financial  distress,  because  provision  must  be 
made  for  the  payment  of  creditors,  and  also  because  in  most 
States  the  sale  of  the  entire  property  of  a  corporation  is  not 
valid  against  dissenting  stockholders  if  the  purchase  price  is 
payable  in  new  securities  or  otherwise  than  in  cash ;  and  finally, 
because  of  the  difficulties  towards  non-assenting  stockholders 
due  to  the  fact  that  necessarily  the  majority  interests  are  both 
purchasers  and  sellers.  In  the  case  of  a  corporation  in  financial 
straits  having  both  common  stock  and  preferred  stock  which  is 
preferred  as  to  assets  as  well  as  dividends,  it  is  usually  out  of 
the  question  to  effect  a  readjustment  by  this  means  without 
the  unanimous  action  of  the  preferred  stock,  because  the  pre- 
ferred stockholders  are  entitled  to  the  proceeds  of  sale,  up  to 
the  par  value  of  their  stock  plus  arrears  in  dividends,  before 
provision  can  be  made  for  the  common  stock. 

There  is  an  interesting  group  of  problems  which  have  often 
been  presented,  and  are  apt  to  be  presented  again,  in  connec- 
tion with  industrial  corporations  of  the  kind  which  were  organ- 
ized in  great  numbers  fifteen  or  twenty  years  ago  with  an  issue 


REORGANIZATION   OF   CORPORATIONS  217 

of  cumulative  preferred  stock,  usually  preferred  both  as  to 
assets  and  dividends,  and  an  issue  of  common  stock,  represent- 
ing the  organizer's  hopes  for  the  future.  In  many  instances 
the  hopes  which  were  thus  capitalized  in  common  stock  were 
not  realized  so  that  eventually  the  corporation  finds  itself  in 
this  predicament :  There  is  a  large  arrears  of  dividends  upon 
its  preferred  stock.  It  may  be  perfectly  solvent  in  the  sense 
that  its  assets  are  ample  for  the  payment  of  its  debts,  and  it 
may  be  earning  substantial  profits.  These,  however,  must  be 
applied  in  payment  of  the  arrears  of  dividends  upon  the  pre- 
ferred stock  before  any  dividend  can  be  declared  upon  the 
common  stock.  But  the  common  stock,  which  may  equal  or 
exceed  in  amount  the  preferred  stock,  has  voting  control  and 
elects  the  directors.  By  reason  of  the  accumulation  of  dividends 
upon  the  preferred  stock  the  prospect  for  dividends  upon  the 
common  stock  is  so  remote  that  the  directors  who  represent 
the  common  stock  are  apt  to  forget  that  the  chief  purpose  of  a 
business  corporation  is  to  pay  dividends.  The  natural  result 
of  such  an  unsatisfactory  situation  is  an  effort  to  recapitalize 
on  a  basis  which  will  more  nearly  represent  the  value  and  earn- 
ing capacity  of  the  property  and  provide  fairly  for  both  the 
preferred  and  common  shares.  It  may  well  be  that  the  aggre- 
gate value  of  the  enterprise  is  less  than  the  par  value  of  the 
preferred  stock  and  its  accumulated  arrears  of  dividends.  This 
naturally  prompts  the  preferred  stockholders  to  feel  that  they 
own  the  property  and  should  give  nothing  on  recapitalization 
to  the  common  stock.  The  common  stockholders,  on  the  other 
hand,  may  say :  We  control  the  corporation  through  our  power 
to  elect  the  directors  and  we  will  not  surrender  our  position 
unless  we  are  recognized  in  the  readjustment.  These  conflict- 
ing views  have,  in  many  cases,  resulted  in  a  deadlock  which 
still  exists  and  which,  perhaps,  some  of  you  may  be  called 
upon  to  break. 

Certain  stockholders  of  the  United  States  Leather  Company 
tried  to  meet  such  a  situation  in  1905  by  organizing  the  Central 


218  REORGANIZATION   OF   CORPORATIONS 

Leather  Company  which  acquired  a  large  majority  of  the  pre- 
ferred stock  and  common  stock  of  the  old  company.  An 
attempt  was  then  made  to  merge  the  old  company  into  the 
new  upon  the  basis  of  exchanging  the  old  preferred  stock  for 
bonds,  preferred  stock  and  common  stock  of  the  new  company. 
Here  we  find  the  inherent  embarrassment,  incident  to  any 
merger  of  this  character,  that  the  same  interests  control  both 
the  merging  and  merged  company  and  the  merger  is  simply  a 
means  of  carrying  out  a  prearranged  plan  which  will  have  the 
effect  of  disturbing  the  relative  positions  of  the  preferred  and 
common  shareholders  of  the  old  company.  The  New  Jersey 
Court  of  Errors  and  Appeals  held  the  merger  invalid  upon  the 
ground  that  the  old  preferred  shareholders  had  a  vested  interest 
in  the  arrears  of  dividends  which  could  not  be  destroyed  with- 
out their  consent.1  This  decision  left  the  Central  Leather 
Company  as  the  owner  of  the  preponderating  majority  of  com- 
mon and  preferred  stock  of  the  United  States  Leather  Com- 
pany, which  continued  for  several  years  as  the  operating  com- 
pany, paying  dividends  to  the  holding  company,  which  in  turn 
distributed  this  income  by  way  of  dividends  upon  its  own  shares. 
Ultimately  the  old  company  was  successfully  merged  into  the 
new  company,  presumably  after  the  latter  had  acquired  by 
purchase  all  the  shares  of  the  old  company. 
I  A  somewhat  different  method  of  meeting  the  same  problem 
was  adopted  by  the  American  Malt  Corporation.  This  cor- 
poration was  organized  in  1897,  with  approximately  $15,000,000 
of  cumulative  preferred  stock  and  $15,000,000  of  common 
stock.  In  1906  it  found  itself  entirely  solvent  but 'its  earnings 
were  insufficient  to  pay  the  current  dividends  on  its  preferred 
stock,  to  say  nothing  of  the  forty-five  and  one-half  per  cent 
accumulated  arrears  of  dividends.  A  new  corporation  called 
the  American  Malt  Corporation  was  formed  under  the  laws  of 
New  Jersey  with  an  authorized  capital  stock  of  $9,000,000 
of  preferred  and  $6,000,000  of  common  stock.  It  offered  to 

1  Colgate  v.  United  States  Leather  Co.,  ante. 


REORGANIZATION    OF   CORPORATIONS  219 

acquire  the  outstanding  common  and  preferred  shares  of  the  old 
company  on  the  basis  of  $62  in  new  preferred  stock  for  each 
share  of  old  preferred  stock,  including  arrears  of  dividends, 
and  $44  in  new  common  stock  for  each  share  of  old  common 
stock.  Under  this  plan,  a  full  dividend  paid  by  the  old  com- 
pany upon  its  preferred  stock  would  provide  the  new  company 
with  an  income  sufficient  to  pay  the  full  dividend  upon  the 
new  preferred  stock  and  a  substantial  dividend  upon  the  new 
common  stock.  Before  very  long  over  ninety  per  cent  of  each 
class  of  the  old  stock  had  been  acquired,  and  the  new  company 
continued  as  the  holding  company  and  the  old  company  as  the 
operating  company.  Gradually  additional  amounts  of  the  old 
stock  were  exchanged  until  in  1913  the  new  company  had  ac- 
quired over  ninety-eight  per  cent  of  the  old  stock.  Then  an 
attempt  was  made  to  merge  the  old  company  into  the  new,  but 
this  plan  was  defeated  by  the  refusal  of  the  Board  of  Public 
Utility  Commissioners  of  New  Jersey  to  approve  the  merger. 
Their  refusal  was  based  on  the  grounds,  first,  that  the  businesses 
of  the  two  corporations  were  not  similar  in  character  within 
the  meaning  of  the  Corporation  Act  permitting  merger,  as  one 
was  a  manufacturing  company  and  the  other  a  holding  com- 
pany ;  and  second,  that  the  property  did  not  justify  the  pro- 
posed capitalization  of  $15,000,000  and  therefore  involved  an 
issue  of  stock  at  less  than  par;  and  third,  that  the  plan  was 
unfair  to  the  preferred  stockholders.  The  Supreme  Court  of 
New  Jersey  upheld  the  action  of  the  Board  upon  the  last  two 
grounds  and  this  decision  was  sustained  by  the  Court  of  Errors 
and  Appeals.1  I  understand  that  the  plan  was  then  dropped 
and  that  no  attempt  has  since  been  made  to  complete  the  re- 
adjustment. 

I  cannot  furnish  a  more  instructive  illustration  of  the  appli- 
cation of  several  of  the  principles  to  be  applied  in  voluntary 
readjustments  of  capitalization  than  by  briefly  describing 

1  American  Malt  Corporation  v.  Board  of  Public  Utility  Commissioners,  92 
Atl.  362 ;  1914. 


220  REORGANIZATION   OF   CORPORATIONS 

three  successive  voluntary  readjustments  of  the  capital  and 
debt  of  a  certain  well-known  and  now  highly  prosperous  indus- 
trial corporation.1 

This  company  was  organized  in  1885  with  a  comparatively 
small  capital.  I  shall  pass  over  its  first  recapitalization  five 
years  later  when  the  enterprise,  by  the  unanimous  action  of  its 
stockholders,  was  transferred  from  the  original  company  to  a 
new  company  having  a  larger  capital  and  a  special  charter 
conferring  very  broad  powers.  There  were  successive  increases 
in  the  authorized  capital  of  the  company  and  in  1891  it  had 
outstanding  about  $7,000,000  of  common  stock  out  of  an 
authorized  issue  of  $10,000,000.  Having  incurred  a  large 
floating  debt,  it  found  itself  in  embarrassed  circumstances,  and 
in  order  to  meet  the  situation  the  following  readjustment  was 
adopted : 

The  company,  by  an  appropriate  vote  of  its  stockholders, 
authorized  $4,000,000  of  preferred  stock.  It  had,  however, 
only  $3,000,000  of  unissued  stock  and  accordingly  it  asked 
its  stockholders  to  surrender  forty  per  cent,  of  their  hold- 
ings, and  in  order  to  encourage  this  surrender  it  was  provided 
that  the  remaining  sixty  per  cent,  of  the  stock  retained  by  the 
assenting  stockholders  should  be  called  "assenting  stock"  and 
should  become  a  second  preferred  stock  entitled  to  dividends 
in  preference  to  the  common  stock  held  by  those  who  declined 
to  turn  in  the  forty  per  cent,  of  their  holdings.  The  holders  of 
all  the  common  stock  except  about  six  thousand  shares  joined 
in  the  Plan  (years  later  all  came  in)  so  that  the  Company,  be- 
sides its  $3,000,000  of  unissued  stock,  had  $2,600,000  of  full- 
paid  stock  surrendered  by  stockholders.  One  million  dollars 
of  this  latter  stock,  together  with  the  $3,000,000  of  unissued 
stock,  was  used  to  make  up  the  $4,000,000  of  preferred  stock, 
and  the  balance,  $1,600,000,  remained  in  the  treasury  as  "as- 

1  The  Westinghouse  Electric  &  Manufacturing  Company.  For  a  study  of 
its  principal  readjustment,  see  Dewing,  Corporate  Promotions  and  Reorgani- 
zations (Harvard  Economic  Studies,  Vol.  X),  p.  165. 


REORGANIZATION   OF   CORPORATIONS  221 

senting"  or  second  preferred  stock.  The  corporation  therefore 
had  $4,000,000  of  first  preferred  stock  and  $1,500,000  of  second 
preferred  stock,  all  of  which  was  fully  paid  except  the  $3,000,000 
of  unissued  preferred  stock,  so  that  the  entire  block  of  stock 
could  have  been  sold  for  $3,000,000.  As  a  matter  of  fact,  it 
was  sold  on  a  much  more  favorable  basis  than  that,  and  the 
crisis  was  successfully  met. 

The  Company  prospered  and  grew,  indeed  it  grew  too 
rapidly  for  its  capital,  for  by  1907  it  was  confronted  with  a 
financial  crisis  more  grave  than  the  one  of  fifteen  years  before. 
By  this  time  it  had  outstanding,  roughly,  the  following  securi- 
ties: 

Preferred  Stock $  4,000,000 

Assenting  and  non-assenting  common  stock,  about       .     .     .  25,000,000 

Five  per  cent.  Convertible  Bonds 18,500,000 

Other  obligations,  chiefly  floating  debt 16,500,000 

The  Company  found  itself  unable  to  meet  its  maturing  float- 
ing debt  and  accordingly,  upon  a  creditor's  bill  and  the  usual 
answer  of  the  Company,  receivers  were  appointed  by  the  Federal 
District  Courts. 

A  bondholders'  protective  committee  was  formed  which  pre- 
pared a  Plan  of  Reorganization,  to  which  it  is  unnecessary  to 
refer,  as  it  was  never  carried  into  effect.  The  receivers  were 
able  to  continue  the  business  very  efficiently  under  the  liberal 
orders  of  the  Federal  courts,  and  they  were  even  authorized 
to  pay  the  maturing  interest  upon  the  bonds,  thereby  prevent- 
ing a  default  upon  the  bonds  and  an  acceleration  of  their 
maturity  by  the  Trustee.  A  so-called  "Merchandise  Creditors' 
Committee"  carried  through  a  Plan  whereby  the  merchandise 
creditors  took  new  common  stock  at  par  in  payment  for  claims 
aggregating  about  $4,000,000,  the  stockholders  paid  a  cash 
assessment  aggregating  about  $6,000,000,  receiving  therefor 
new  common  stock  at  par,  and  bank  creditors  to  the  amount 
of  some  $8,000,000  were  paid  in  part  by  long-time  obligations 
and  in  part  by  stock  at  par.  The  convertible  bonds  were  not 


222  REORGANIZATION   OF   CORPORATIONS 

disturbed.  Thus  the  holders  of  the  greater  part  of  the  floating 
debt  agreed  to  take  new  securities  and  sufficient  cash  was  pro- 
vided to  pay  the  balance  of  the  floating  debt  and  provide  work- 
ing capital.  Thereupon  the  Company  filed  a  petition  in  each 
of  the  United  States  District  Courts  in  which  Receivers  had 
been  appointed,  setting  forth  the  facts  and,  after  allowing  time 
for  creditors  to  be  heard  and  being  satisfied  that  upon  the  con- 
summation of  the  Plan  the  Company  would  be  solvent  and 
that  provision  had  been  made  for  all  of  its  overdue  debts,  each 
Court  entered  an  order  discharging  the  Receivers.  This  in 
many  ways  is  the  most  remarkable  voluntary  readjustment  of 
capital  with  which  I  am  familiar. 

With  the  added  strength  resulting  from  this  readjustment, 
the  Company  again  prospered  and  grew  until  it  reached  an- 
other crisis  brought  on  by  prosperity.  The  agreement  secur- 
ing its  convertible  bonds  limited  the  purposes  for  which  they 
could  be  issued,  precluded  the  incurring  of  other  debt  beyond 
a  certain  limit  which  had  almost  been  reached  as  a  result  of 
increased  business,  and  placed  limitations  upon  the  issue  of 
common  stock  with  which  it  would  have  been  difficult  to  comply 
even  if  additional  common  stock  could  have  been  marketed, 
which  was  not  the  case,  as  its  market  price  was  below  par. 
The  redemption  of  the  convertible  bonds  and  the  creation  of  a 
new  issue  of  bonds  would  have  been  a  most  expensive  opera- 
tion, inasmuch  as  they  were  selling  several  points  below  par 
and  could  be  redeemed  only  at  a  premium  of  five  per  cent  above 
par,  and  of  course  the  cost  of  selling  a  new  issue  of  securities 
would  be  considerable.  This  is  an  excellent  illustration  of  a 
prosperous  and  thoroughly  solvent  corporation  requiring  re- 
adjustment because  defects  in  its  financial  structure  prevented 
it  from  securing  additional  capital  required  for  the  develop- 
ment of  its  business. 

When  the  prosperity  resulting  from  the  European  war  sent 
the  common  stock  of  the  Company  above  par,  the  Board  of 
Directors  authorized  a  new  issue  of  convertible  bonds  precisely 


REORGANIZATION  OF  CORPORATIONS     223 

like  the  old  ones,  except  that  they  were  convertible  into  new 
stock  at  par  instead  of  at  a  premium  of  one  hundred  per  cent, 
as  was  the  case  with  the  original  issue,  and  were  secured  by  a 
trust  indenture  which  omitted  certain  restrictive  covenants 
contained  in  the  trust  indenture  securing  the  old  bonds.  The 
Company  then  offered  to  the  holders  of  the  old  bonds  the  priv- 
ilege of  exchanging  them  for  the  new  bonds  or  for  cash  or  for 
part  cash  and  part  new  bonds,  subject  to  the  prior  offering  to 
the  stockholders  of  the  privilege  of  subscribing  for  the  new  con- 
vertible bonds.  The  sale  of  the  new  bonds  was  underwritten 
by  a  banking  syndicate.  The  net  result  of  this  last  readjust- 
ment was  the  retirement  of  the  old  bonds  and  the  substitution 
of  the  new  bonds  and,  I  may  add,  the  ultimate  conversion  of 
the  greater  part  of  the  latter  into  common  stock  at  par.  As  a 
result  of  this  series  of  voluntary  readjustments  there  is  now  a 
corporation,  practically  out  of  debt,  with  an  issued  capital 
stock  of  about  $4,000,000  of  preferred  and  $37,000,000  of  com- 
mon stock.  No  one  can  estimate  how  different  the  result 
might  have  been  if  at  either  one  of  the  two  earlier  crises  the  for- 
bearance of  creditors  and  the  faith  of  stockholders  had  not 
made  it  possible  to  avoid  a  reorganization  based  upon  fore- 
closure or  other  enforcement  of  the  claims  of  creditors. 

I  think  I  have  said  enough  to  suggest  the  infinite  variety 
and  complexity  of  the  questions  which  are  likely  to  arise  in 
efforts  for  the  voluntary  readjustment  of  the  capital  and  debt 
of  corporations  with  large  amounts  of  securities  in  the  hands 
of  widely  scattered  holders.  There  is  no  department  of  prac- 
tice in  which  there  is  a  greater  opportunity  for  ingenuity,  re- 
sourcefulness and  originality  on  the  part  of  counsel,  and  for 
courage,  patience  and  wisdom  on  the  part  of  security  holders, 
directors  and  officers  of  corporations. 


224  REORGANIZATION   OF   CORPORATIONS 

THE  RECAPITALIZATION  OF  CORPORATIONS  FOR  SOME  OTHER 
PURPOSE  THAN  TO  MEET  INSOLVENCY  OR  CORRECT 
DEFECTS  OF  FINANCIAL  STRUCTURE  AND  WHICH  MAY  BE 
ACCOMPLISHED  EITHER  WITH  OR  WITHOUT  THE  TRANSFER 
OF  THE  PROPERTY  TO  A  NEW  CORPORATION 

Here  again  the  objects  sought  to  be  accomplished  and  the 
methods  employed  are  so  varied  that  few  rules  can  be  laid 
down.  I  can  do  little  more  than  suggest  examples. 

There  is  however  one  underlying  principle  which  it  is  useful 
to  have  in  mind  and  that  is,  that  under  the  decisions  of  the 
United  States  Supreme  Court,  the  Court  of  Appeals  of  New 
York  and  the  courts  of  most  of  the  States,  any  readjustment 
of  the  capitalization  of  a  corporation  which  is  agreed  upon  by 
the  holders  of  all  the  stock  is  binding  upon  the  corporation  and 
all  subsequent  holders  of  the  stock  issued  upon  such  recapitali- 
zation. In  other  words,  leaving  out  of  consideration  the  rights 
of  creditors,  any  such  readjustment  is  permanently  effective  if 
agreed  upon  by  all  the  owners  of  the  property  at  the  time. 

The  rule  is  well  stated  by  our  Court  of  Appeals  in  Seymour 
v.  The  Spring  Forest  Cemetery  Association.1  In  speaking  of  a 
transaction  where  the  owners  of  property  sold  it  at  a  price 
alleged  to  be  greatly  in  excess  of  its  value  to  a  corporation 
which  the  vendors  controlled  and  of  which  they  were  the  only 
stockholders,  Judge  Finch  said  (p.  340) : 

"The  sellers  were  the  buyers.  They  sold  as  individuals  and  bought 
as  a  corporation,  and  no  one  else  had  any  interest  in  the  question  of 
price  or  terms  of  sale.  If  they  were  the  vendors  on  the  one  hand, 
dealing  with  themselves  in  a  corporate  capacity  on  the  other,  they 
were  also  the  sole  beneficiaries  to  be  affected  and  could  not  defraud 
themselves.  The  abstraction  of  the  corporate  entity  should  never  be 
allowed  to  bar  out  and  pervert  the  real  and  obvious  truth.  As  bene- 
ficiaries, the  stockholders  necessarily  assented  to  all  the  details  of  the 
arrangement,  and  no  just  criticism  is  possible  either  upon  the  legality 
or  morality  of  the  transaction."  2 

1  144  N.  Y.  333  ;  1895.        2  See  also  Blum  v.  Whitney,  185  N.  Y.  232 ;   1906. 


REORGANIZATION  OF  CORPORATIONS     225 

I  think  that  practically  all  the  authorities  agree  that  such  a 
transaction  as  I  have  described  is  binding  not  only  upon  the 
original  holders  of  the  stock  but  also  upon  subsequent  holders 
of  that  stock.1  The  same  result  follows  in  the  case  of  bonds. 
Where  an  issue  of  bonds  is  assented  to  by  the  corporation  and 
all  of  its  stockholders  neither  the  original  takers  of  the  bonds 
nor  subsequent  holders  of  the  assenting  stock  can  question  the 
legality  of  the  issue.2 

The  case  of  Mayer  v.  Metropolitan  Traction  Company  3  is  an 
excellent  illustration  of  the  extent  to  which  this  doctrine  has 
been  carried.  In  that  case,  the  owner  of  a  railroad  of  insig- 
nificant value  organized  a  corporation  to  which  it  transferred 
the  railroad  in  exchange  for  $1,500,000  of  bonds  and  $1,500,000 
of  stock.  The  bonds  were  guaranteed  by  their  owner,  a  strong 
corporation,  which  eventually  sold  them  to  investors  and 
pocketed  the  proceeds  of  sale,  not  a  dollar  of  which  was  spent  on 
the  mortgaged  property.  Years  later  when  the  guarantor  corpo- 
ration became  insolvent  and  the  mortgaged  property  was  found 
to  be  almost  worthless,  the  investors  who  held  the  bonds  sought 
through  their  receiver  to  enforce  a  claim  against  the  original 
owner  of  the  bonds,  which  organized  the  corporation  and  received 
its  bonds  and  stock  in  payment  for  the  property  transferred. 
This  seemed  like  a  hard  case,  but  the  Appellate  Division  of  the 
Supreme  Court  for  the  First  Department  found  that  no  legal 
wrong  had  been  committed,  saying  in  their  opinion  (p.  503) : 

1  Cases  supra  and  Barr  v.  New  York,  Lake  Erie  and  Western  Railroad  Com- 
pany, 125  N.  Y.  263;    1891;    Parsons  v.  Hayes,  14  Abb.  N.  C.  (N.  Y.)  419; 
1883  ;  Bostwick  v.  Young,  118  App.  Div.  490 ;  1907 ;  aff'd,  194  N.  Y.  516 ;  1909 ; 
In  re  Syracuse  etc.  R.  R.  Co.,  91  N.  Y.  1 ;   1883 ;  Kent  v.  Quicksilver  Mining  Co., 
78  N.  Y.  159 ;  1879. 

2  Belden  v.  Burke,  147  N.  Y.  542 ;   1895 ;  Mayer  v.  Metropolitan  Traction 
Company,  165  App.  Div.  497 ;  1914 ;    Seymour  v.  Spring  Forest  Cemetery  Asso- 
ciation, supra;   Tompkins  v.  Sperry,  Jones  &  Co.,  54  Atl.  254  (Md.)  ;  1903;  The 
Columbus  Hocking  Valley  etc.  Ry.  Co.  v.  Lanier  (N.  Y.  Sup.  Ct.  1893),  8  N.  Y. 
Law  Jour.  No.  104  (Feb.  4,  1893) ;  Old  Dominion  Copper  Mining  and  Smelting 
Co.  v.  Bigelow,  188  Mass.  315,  325;  1906;   Mason  v.  Carrothers,  74  Atl.  1030 
(Me.)  ;  1909. 

3 165  App.  Div.  497  ;  1914. 


226    '  REORGANIZATION  OF  CORPORATIONS 

"  .  .  .  the  vendor  and  vendee  could  lawfully  put  any  price  upon 
the  property  which  they  chose,  and  if  the  price  was  agreed  upon  by 
all  persons  interested  as  directors  and  stockholders  in  the  vendee  com- 
pany, as  it  appears  to  have  been  in  this  case,  neither  that  company  nor 
anyone  suing  in  its  right  can  question  the  transaction  on  the  ground 
that  the  price  was  too  high." 

When  we  come  to  consider  the  effect  of  such  a  transaction 
upon  the  holders,  not  of  the  original  issue  of  stock,  but  of  stock 
subsequently  issued,  we  find  the  courts  divided.  The  most 
interesting  instance  of  this  is  furnished  by  the  Old  Dominion 
Copper  Company  litigation,  in  which  the  Supreme  Court  of 
the  United  States  and  the  Supreme  Court  of  Massachusetts 
reached  diametrically  opposite  conclusions  upon  precisely  the 
same  state  of  facts.  In  that  case,  Bigelow,  Lewisohn  and  their 
associates  organized  a  mining  company  of  which  they  became 
the  sole  stockholders  and  of  which  the  board  of  directors  was 
composed  of  themselves  and  their  nominees.  They  sold  to  the 
corporation  certain  mining  property  wrhich  they  owned,  in 
return  for  an  amount  of  stock  greatly  in  excess  of  the  value 
of  the  property.  Then,  without  any  disclosure  of  the  profit 
which  they  were  making,  they  caused  the  corporation  to  sell 
to  the  public  for  cash  an  additional  amount  of  stock  for  working 
capital.  Several  years  later,  the  corporation  brought  suit 
against  Bigelow  in  Massachusetts  in  the  State  court  and  against 
Lewisohn  in  New  York  in  the  Federal  Court  to  rescind  the 
sale  or  for  an  accounting  or  damages.  The  Supreme  Court  of 
Massachusetts  held  that  the  corporation  was  entitled  to  recover 
upon  the  theory  that  Bigelow  and  Lewisohn,  being  promoters, 
were  bound  to  make  disclosure  of  their  profit  and  that  their 
own  knowledge  "was  not  equivalent  to  a  disclosure  to  the 
plaintiff  corporation,  although  they  owned  all  the  stock  of  the 
plaintiff  corporation  outstanding  at  the  time  the  sale  was 
made."  The  Court  seems  to  have  assumed  that  subsequent 
purchasers  of  the  particular  stock  originally  issued  to  Lewisohn 
and  Bigelow,  would  be  "bound  by  the  acquiescence  of  their 


REORGANIZATION   OF   CORPORATIONS  227 

vendors"  and  that  the  corporation  would  have  been  bound 
had  the  transaction  been  "acquiesced  in  not  only  by  all  those 
interested  but  by  all  those"  who,  it  was  contemplated,  should 
"  be  interested  in  the  corporation,  except  as  third  persons  should 
acquire  the  interest  of  some  one  or  more  of  those  persons." 
The  Court,  however,  found  a  cause  of  action  in  the  corporation 
because  of  the  subsequent  issue  of  stock  to  subscribers  to  whom 
no  disclosure  of  the  promoters'  profit  had  been  made,  particu- 
larly as  such  subsequent  issue  was  contemplated  at  the  time 
of  the  original  transaction.1 

The  Circuit  Court  of  Appeals  for  the  Second  Circuit  in  the 
suit  against  Lewisohn  reached  precisely  the  opposite  conclu- 
sion and  its  decision  was  affirmed  by  the  Supreme  Court  of 
the  United  States.2  The  opinion  of  Mr.  Justice  Holmes  pro- 
ceeded upon  the  theory  that  at  the  time  of  the  original  trans- 
action "  there  was  no  wrong  done  to  any  one.  Bigelow,  Lewisohn 
and  their  syndicate  were  on  both  sides  of  the  bargain,  and  they 
might  issue  to  themselves  as  much  stock  in  their  corporation 
as  they  liked  in  exchange  for  their  conveyance  of  their  land," 
and  that  the  assent  originally  given  by  all  the  stockholders 
bound  the  corporation  for  all  time  inasmuch  as  its  identity 
was  not  changed  by  the  subsequent  addition  of  new  members, 
for,  as  Justice  Holmes  tersely  said,  "a  corporation  does  not 
change  its  identity  by  adding  a  cubit  to  its  stature." 

After  the  decision  in  the  United  States  Supreme  Court, 
Bigelow  endeavored  to  secure  a  rehearing  of  his  case  by  the 
Massachusetts  Supreme  Court,  but  this  was  refused,  and  in  the 
end  Bigelow  or  his  estate  was  compelled  to  pay  under  the  deci- 
sion of  the  Supreme  Court  of  Massachusetts  while  Lewisohn 
went  scot  free  under  the  decision  of  the  Supreme  Court  of 
the  United  States. 

The  question  involved  in  the  Old  Dominion  Copper  Com- 
pany 3  litigation  subsequently  came  before  the  Supreme  Court 

1  Old  Dominion  Copper,  etc.,  Co.  v.  Bigelow,  188  Mass.  315;   1905. 

2  Ibid.,  Lewisohn,  210  U.  S.  206 ;  1908.  3  See  ante. 


228  REORGANIZATION   OF   CORPORATIONS 

of  Maine  in  Mason  v.  Carrothers.1  That  court  followed  the 
Supreme  Court  of  Massachusetts  and  refused  to  follow  the  Su- 
preme Court  of  the  United  States.  It  attempted,  however, 
to  distinguish  the  case  before  it  upon  the  ground  that  the  suit 
was  brought,  not  by  the  corporation,  but  by  the  stockholders 
who  purchased  stock  from  the  treasury  of  the  corporation,  and 
it  construed  the  opinion  of  the  Supreme  Court  of  the  United 
States  as  intimating  that  subsequent  purchasers  of  stock  from 
the  corporation  might  have  the  right  to  maintain  an  action 
because  they  were  the  parties  who  were  wronged.  This  con- 
struction is  erroneous  because  the  kind  of  action  which  the 
Supreme  Court  had  in  mind  in  the  intimation  referred  to  was 
an  action  by  the  purchasers  of  the  stock  for  deceit,  while  in 
the  case  before  the  Supreme  Court  of  Maine  the  suit  was  by 
stockholders  to  compel  the  holders  of  the  stock  under  attack 
to  surrender  it  to  the  corporation  for  cancellation. 

I  have  discussed  thus  fully  the  doctrines  of  the  Old  Dominion 
Copper  cases,  Blum  v.  Whitney  and  similar  cases,  because  they 
come  up  so  frequently  in  cases  of  voluntary  recapitalization. 

I  will  now  give  a  few  examples  of  recapitalization. 

A  corporation  which  has  accumulated  a  large  surplus  fre- 
quently wishes  to  distribute  among  its  stockholders  some 
security  to  represent  this  accumulation.  Often  stock  to  a  par 
amount  not  exceeding  the  surplus  is  distributed  among  the 
stockholders.  This  is  called  a  stock  dividend.  In  this  coun- 
try, bonds  or  other  obligations  may  also  be  issued  for  this  pur- 
pose 2  in  the  absence  of  a  statute  to  the  contrary.3 

If  a  corporation  with  a  large  surplus  whose  stock  is  selling 
substantially  above  par,  wishes  to  accomplish  the  double 

1  74  Atl.  1030 ;  1909. 

*  Wood  v.  Lary,  47  Hun.  550  ;  N.  Y.  1888  ;  aJTd,  124  N.  Y.  83  ;  1891 ;  Bil- 
lingham  v.  Gleason  Mfg.  Co.,  91  N.  Y.  Supp.  1046 ;  1905 ;  Barnard  v.  Vermont 
etc.  R.  R.  Co.,  7  Allen  (Mass.)  512  ;  1863.  See  also  Bailey  v.  R.  R.  Co.,  22  Wall. 
(U.  S.)t  604;  1874.  As  to  England  see  Wood  v.  Odessa  Waterworks  Co.  (1889), 
42  Ch.  Div.  636 ;  Hoole  v.  Great  Western  Ry.  Co.  (1867),  3  Ch.  App.  262. 

8  See  Delaware  General  Corp.  Law,  par.  35,  as  amended  by  Laws  1911,  Chap. 
188,  Sees.  1  and  2. 


REORGANIZATION   OF   CORPORATIONS  229 

purpose  of  practically  distributing  a  stock  dividend  and  at  the 
same  time  securing  additional  capital,  it  may  offer  stock  to  its 
stockholders  for  pro  rota  subscription  at  a  price  below  the 
actual  value  of  the  stock,  but  of  course  not  less  than  par. 
Such  an  offer  does  not  necessarily  place  upon  the  stockholder 
the  burden  of  actually  subscribing  for  his  pro  rata  share  of  the 
new  stock,  because  his  right  to  subscribe  is  usually  evidenced 
by  a  transferable  warrant  which  should  be  saleable  on  a  basis 
which  represents  approximately  the  difference  between  the  sub- 
scription price  and  the  market  value  of  the  stock  which  he  is 
entitled  to  purchase. 

Except  in  the  case  of  a  corporation  having  a  charter  which 
expressly  provides  for  the  sale  of  stock  without  first  offering 
it  to  stockholders,  new  stock  (as  distinguished  from  stock  which 
has  already  been  issued  and  has  been  acquired  by  the  corpora- 
tion as  treasury  stock)  must  always  be  offered  for  pro  rata  sub- 
scription to  the  stockholders  before  it  is  sold  to  others.1  Even 
where  the  charter  contains  such  a  provision,  the  new  stock 
should  be  offered  to  stockholders  before  it  is  sold  to  others  at 
less  than  its  fair  market  price. 

Perhaps  the  most  frequent  case  of  recapitalization  is  where 
the  stock  of  a  corporation  has  been  closely  held  during  the 
period  of  development  and  does  not  represent  the  actual  value 
of  the  property,  and  the  owners  for  some  reason,  usually  for  the 
purpose  of  creating  a  market  for  their  securities,  desire  a  capi- 
talization based  upon  the  actual  value  and  earning  capacity  of 
the  enterprise  and  more  nearly  in  scale  with  the  capitalization 
of  other  similar  enterprises.  Here  the  problem  is  quite  simple 
if  the  assent  of  the  entire  outstanding  capital  stock  can  be  pro- 
cured. Either  of  two  methods  may  then  be  used.  One  method 
is  to  authorize  the  new  securities  to  such  an  amount  as  the 
value  of  the  property  will  justify  and  then  issue  them  pro  rata 
to  the  holders  of  the  old  stock  as  a  dividend.  Under  the  doc- 
trine of  Old  Dominion  Copper  Company  v.  Lewisohn,  and  Blum 

1  Stokes  v.  Continental  Trust  Co.,  186  N.  Y.  285 ;   1906, 


230  REORGANIZATION   OF   CORPORATIONS 

v.  Whitney  (supra),  there  can  be  no  objection  to  the  securities 
thus  issued  inasmuch  as  all  the  stockholders  have  agreed  to 
their  issue,  it  being  assumed  that  the  rights  of  creditors  are  not 
impaired. 

The  other  method,  and  the  one  usually  adopted,  is  to  organ- 
ize a  new  corporation  with  authority  to  issue  the  required 
amount  of  securities  and  cause  it  to  acquire  the  business  and 
property  of  the  old  corporation,  issuing  in  payment  its  own 
securities  in  the  required  amount,  which  are  received  by  the 
old  company  and  distributed  among  its  stockholders  after 
provision  has  been  made  for  creditors,  which  is  usually 
done  by  the  new  company  assuming  the  debts  of  the  old 
company. 

In  some  States  it  is  possible  to  issue  obligations  to  retire 
preferred  stock.  A  very  interesting  application  of  this  device 
was  made  by  the  United  States  Steel  Corporation  in  1902 
when  it  issued  $200,000,000  of  Five  Per  Cent.  Bonds  to  provide 
for  the  retirement  of  an  equal  amount  of  Seven  Per  Cent.  Pre- 
ferred Stock.  This  transaction  was  upheld  by  the  New  Jersey 
Court  of  Errors  and  Appeals  in  Berger  v.  United  States  Steel 
Corporation.1 

A  very  convenient  method  of  accomplishing  the  practical 
recapitalization  of  an  enterprise  where  the  entire  capital  stock 
is  not  under  control  is  by  means  of  the  so-called  holding  com- 
pany. The  holding  company  is  a  comparatively  modern  de- 
vice. It  was  the  law  in  most  of  the  States  until  a  few  years 
ago,  that  a  corporation  had  no  power  to  hold  the  stocks  of 
other  corporations.  The  general  power  to  do  so  was  not  con- 
ferred by  statute  in  New  York  until  the  enactment  of  Chapter 
688  of  the  Laws  of  1892.2  It  was  conferred  a  few  years 
earlier  in  New  Jersey.3  In  some  States,  as  in  Illinois,4  and 

1  63  N.  J.  Eq.  809  ;  1902. 

3  See  Laws  1890,  Chap.  564,  Sec.  40,  and  Laws  1850,  Chap.  140,  Sec.  8. 
8  In  1889. 

4  Act  of  June  11,  1897,  Sec.  1 ;   111.  Stat.  Annot.  1913,  par.  8748;  Laws  I1L 
1913,  p.  475. 


REORGANIZATION   OF   CORPORATIONS  231 

Missouri 1  it  has  never  been  conferred  except  to  a  limited 
extent  in  the  case  of  certain  classes  of  corporations. 

I  have  already  called  attention  to  one  of  the  frequent  uses 
of  the  holding  company  in  the  recapitalization  of  industrial 
corporations  having  outstanding  preferred  stock  with  large 
arrears  of  dividends,  as  in  the  case  of  the  Central  Leather 
Company  and  the  American  Malt  Corporation.  It  is  fre- 
quently resorted  to  where  the  unanimous  action  of  stockholders 
cannot  be  procured  at  the  outset  and  as  a  means  of  accom- 
plishing the  ultimate  direct  recapitalization  of  one  or  more 
underlying  enterprises.  An  interesting  illustration  of  this  is 
furnished  by  the  history  of  the  Metropolitan  Traction  Com- 
pany, which  was  a  holding  company,  pure  and  simple,  organ- 
ized to  acquire  the  capital  of,  and  ultimately  consolidate, 
various  street  railway  corporations  operating  street  surface 
railroads  in  New  York  City.  Gradually  the  entire  capital 
stock  of  all  of  the  important  underlying  companies  was  ac- 
quired and  by  means  of  consolidations  and  mergers  they  were 
welded  into  one  railroad  corporation,  called  the  Metropolitan 
Street  Railway  Company,  all  of  the  capital  stock  of  which 
was  owned  by  the  Metropolitan  Traction  Company  as  the 
holding  company.  The  latter  then  went  into  voluntary  liqui- 
dation and  distributed  the  stock  of  the  Metropolitan  Street 
Railway  Company  among  its  stockholders.  The  holding  com- 
pany having  thus  accomplished  its  mission  was  dissolved. 
The  Brooklyn  Rapid  Transit  Company  was  organized  for  a 
similar  purpose  and  is  still  a  holding  company,  pure  and 
simple. 

In  the  last  few  years  the  organization  of  holding  companies 
has  become  less  fashionable  than  formerly,  both  because  of 
restrictive  Federal  and  State  legislation  and  because  of  their 
unpopularity,  due  partly  to  the  misfortunes  of  certain  ill-con- 
ceived holding  companies  and  the  extent  to  which  they  were 
organized  in  carrying  through  consolidations  which,  although 

i  Rev,  Stat.  (1909),  §§  3316,  3329,  3443. 


232  REORGANIZATION   OF   CORPORATIONS 

deemed  lawful  at  the  time  of  their  organization,  were  subse- 
quently held  to  have  been  organized  in  violation  of  the  Federal 
Anti-trust  Laws.  The  enactment  of  the  so-cal,led  "Seven 
Sisters"  by  the  Legislature  of  New  Jersey  in  1913  1  has  prac- 
tically put  an  end  to  the  organization  of  holding  companies  in 
New  Jersey  except  within  very  narrow  limits,  and  Section  7 
of  the  Clayton  Act 2  enacted  by  Congress  in  1914  provides  that 

"No  corporation  shall  acquire,  directly  or  indirectly,  the  whole  or 
any  part  of  the  stock  or  other  share  capital  of  two  or  more  corporations 
engaged  in  commerce  where  the  effect  of  such  acquisition,  or  the  use  of 
such  stock  by  the  voting  or  granting  of  proxies  or  otherwise,  may  be 
to  substantially  lessen  competition  between  such  corporations,  or  any 
of  them,  whose  stock  or  other  share  capital  is  so  acquired,  or  to  re- 
strain such  commerce  in  any  section  or  community,  or  tend  to  create 
a  monopoly  of  any  line  of  commerce." 

No  discussion  of  the  practical  aspects  of  voluntary  recapi- 
talization would  be  complete  without  a  reference  to  the  strange 
form  of  organization  commonly  known  as  a  "Massachusetts 
Trust,"  which  seems  to  have  found  its  origin  in  the  fact  that 
the  Massachusetts  statutes  did  not  permit  the  organization  of 
a  corporation  to  hold  land.  In  Massachusetts  the  rule  against 
perpetuities  apparently  is  satisfied  if  all  rights  vest  during  any 
number  of  lives  in  being,  which  may  be  those  of  complete 
strangers  to  the  trust.  Although  in  Windsor  v.  Mills*  there 
is  a  dictum  to  the  effect  that  the  permissible  period  of  restraint 
on  alienations  should  be  assimilated  to  that  of  the  rule  against 
perpetuities,  no  limitation  upon  restrictions  on  alienation  of 
equitable  estates  has  yet  been  made.4  The  practical  result  of 
this  is  that  if  it  is  so  stipulated  in  a  deed  of  trust,  there  will  not, 
as  in  New  York  and  elsewhere,  be  a  merger  of  the  legal  and 
equitable  estates,  even  though  the  entire  present  equitable 

i  Laws  1913,  Chaps.  13,  14,  15,  16,  17,  18  and  19. 

*  U.  S.  Stat.  1914,  Chap.  321. 

3 157  Mass.  362 ;  1892. 

4  Southard  v.  Southard,  210  Mass.  347  ;  1911. 


REORGANIZATION  OF  CORPORATIONS     233 

estate  and  the  entire  future  legal  estate  are  vested  in  the  same 
person.1  In  Massachusetts  there  is  also  another  rule,  not 
generally  current,  that  a  provision  in  a  partnership  agreement 
that  partnership  interests  may  be  freely  sold  without  terminat- 
ing the  partnership,  is  valid  and  effective.2 

Under  these  favoring  laws  the  custom  has  grown  up  in 
Massachusetts  of  depositing  shares  of  one  or  more  corporations 
with  trustees  under  declarations  of  trust,  which  provide  for 
the  use  of  a  name  like  that  of  a  corporation,  the  issue  of  freely 
vendable  certificates  of  interest  or  shares,  with  or  without  par 
value,  the  election  of  directors,  and  many  other  attributes  of 
a  corporation.  These  organizations  fall  roughly  into  two  classes, 
those  which  are  strict  trusts  and  those  which  I  may  call  part- 
nership trusts.  In  the  strict  trust  the  certificate  holders  are 
not  personally  liable  for  the  organization's  debts,  but  they 
apparently  have  no  right  of  control  over  the  business  unless  it 
be  that  certain  things  may  not  be  done  without  their  consent. 
In  the  partnership  trust  the  estate  is  usually  handled  by  the 
trustees  under  the  direction  of  the  certificate  holders  or  of  a 
committee  appointed  by  them,  which  may  or  may  not  include 
the  trustees,  and  in  this  case  the  partners  may,  depending  on 
the  particular  form  of  the  transaction,  be  held  liable  for  the 
organization's  debts.3 

While  these  trusts  are  sometimes  created  to  operate  enter- 
prises, they  are  more  frequently  used  to  accomplish  the  same 
purpose  as  holding  companies  in  cases  where  for  some  reason 
it  is  not  wise  to  organize  a  holding  company. 

There  are  a  considerable  number  of  organizations  of  this 
character  which  are  doubtless  generally  assumed  to  be  cor- 

1  Broadway  National  Bank  v.  Adams,  133  Mass.  170 ;  1882 ;  and  subsequent 
cases  citing  it. 

* Phillips  v.  Blatchford,  137  Mass.  510;  1884;  Williams  v.  Milton,  215 
Mass.  1 ;  1913. 

3  Mayo  v.  Moritz,  151  Mass.  481;  1890;  Hussey  v.  Arnold,  185  Mass.  202; 
1904;  Williams  v.  Milton,  215  Mass.  1;  1913;  Frost  v.  Thompson,  219  Mass. 
360;  1914;  Howe  v.  Morse,  174  Mass.  491 ;  1899. 


234  REORGANIZATION   OF   CORPORATIONS 

porations.  The  Mackay  Companies,  the  Massachusetts  Gas 
Companies,  and  the  Chicago  Elevated  Railways,  Unincor- 
porated, are  conspicuous  examples.1 

1  The  Massachusetts  statues  relating  to  these  trusts  are  Chapter  441  of 
1909,  as  amended  by  Chapter  454  of  1913  and  Chapter  471  of  1914,  and  Chap- 
ters 509  and  596  of  1913. 

Chapter  596  of  1913  provides  for  annual  publication  by  the  Massachusetts 
State  commissioner  of  corporations  of  the  trust  agreements  on  file  in  his  office. 
Copies  of  this  publication  are  easily  to  be  had  and  contain  a  variety  of  precedents. 

S.  R.  Wrightington's  Unincorporated  Associations,  Boston,  1916,  in  addition 
to  much  valuable  information  on  the  subject  generally,  has  an  appendix  which 
contains  a  number  of  precedents,  some  of  which  have  been  passed  upon  by 
the  Massachusetts  courts. 

Other  books  and  articles  on  the  subject  are  :  J.  H.  Sears's  Trust  Estates  as 
Business  Companies,  St.  Louis,  1912 ;  A.  D.  Chandler's  Express  Trusts  under 
the  Common  Law,  Boston,  1912,  and  an  article  by  Mr.  Wrightington  in  the 
Yale  Law  Journal  for  February,  1912. 


THE  SHERMAN  ANTI-TRUST  LAW 

A  Lecture  Delivered  before  the  Association  of  the  Bar  of  the  City  of  New  York 
by  George  W.  Wickersham,  March  15,  1916 

SENATOR  GEORGE  F.  HOAR,  of  Massachusetts,  in  a  eulogy  of 
John  Sherman,  delivered  in  the  Unites  States  Senate  after  the 
death  of  the  latter,  said : l 

"It  is  a  little  singular  that  the  two  great  measures  that  are  called 
by  his  name  are  measures,  one  of  which  he  disapproved,  and  with 
the  other  of  which  he  had  nothing  to  do.  I  mean  the  bill  for  the  pur- 
chase of  silver,  known  as  the  Sherman  Law,  and  the  bill  in  regard 
to  trusts,  known  as  the  Sherman  Antitrust  Law.  The  former  was 
adopted  against  his  protest  by  a  committee  of  conference,  although 
he  gave  it  a  reluctant  and  disgusted  support  at  the  end.  .  .  .  The 
other,  known  as  the  Sherman  Antitrust  Bill,  I  suppose  he  introduced 
by  request.  I  doubt  very  much  whether  he  read  it.  If  he  did,  I  do 
not  think  he  ever  understood  it.  It  was  totally  reconstructed  in  the 
Judiciary  Committee." 

This  statement  was  probably  the  origin  of  the  impression, 
widely  disseminated  in  the  community  at  a  later  date  when 
the  true  meaning  and  effect  of  the  Sherman  Law  began  to  be 
understood  and  felt,  that  the  bill  had  been  framed  in  haste  and 
passed  in  ignorance  of  its  meaning,  with  a  confused  idea  of  its 
effect.  Nothing  could  be  more  remote  from  the  actual  facts, 
and  Senator  Hoar's  statement  furnishes  another  example  of  the 
effect  of  time  upon  the  memory  of  even  acute-minded  and  able 
men. 

Senator  Sherman's  original  bill  was  introduced  in  the  Senate 
on  August  14,  1888.  It  was  entitled,  "A  bill  to  declare  unlaw- 
ful trusts  and  combinations  in  restraint  of  trade  and  produc- 
tion." It  provided  that  "all  arrangements,  contracts,  agree- 

1  Autobiography  of  Seventy  Years,  Vol.  II,  p.  22. 
235 


236  SHERMAN   ANTI-TRUST   LAW 

ments,  trusts,  or  combinations  between  persons  or  corporations, 
made  with  a  view,  or  which  tend,  to  prevent  full  and  free  com- 
petition in  the  production,  manufacture,  or  sale  of  articles  of 
domestic  growth  or  production,  or  of  the  sale  of  articles  im- 
ported into  the  United  States,  and  all  arrangements,  contracts, 
agreements,  trusts,  or  combinations  between  persons  or  corpora- 
tions designed,  or  which  tend,  to  advance  the  cost  to  the  con- 
sumer of  any  of  such  articles,  are  hereby  declared  to  be  against 
public  policy,  unlawful  and  void ;  .  .  ." 

A  right  of  action  was  given  to  any  person  injured  by  any 
such  agreement,  etc.,  and  it  was  declared  that  any  corporation 
doing  business  within  the  United  States  which  took  part  in 
any  such  arrangement  should  forfeit  its  corporate  franchise. 

The  bill  was  referred  to  the  Finance  Committee,  was  reported 
with  certain  amendments  a  month  later,  was  briefly  debated  in 
the  following  January,  again  recommitted  and  re-reported  with 
further  amendments,  upon  which  there  was  further  debate, 
during  which  Senator  George,  of  Mississippi,  subjected  the 
measure  to  severe  criticism  and  demonstrated  that  it  was  be- 
yond the  constitutional  power  of  Congress  to  enact,  because  it 
did  not  attempt  to  regulate  commerce  among  the  States,  but 
only  transactions  which  antedated  that  commerce.  This  was 
during  the  short  session  of  Congress.  During  the  same  session, 
fourteen  bills  relating  to  the  same  subject  were  introduced  into 
the  House  of  Representatives,  where  they  were  the  subject  of 
some  discussion.  At  the  following  session,  in  December,  1889, 
the  first  bill  introduced  in  the  Senate  was  Senator  Sherman's 
amended  bill  (S.  1),  bearing  the  same  title  as  that  introduced 
by  him  at  the  previous  session,  but  modified  to  meet  the  criti- 
cisms that  had  been  made  of  it  during  the  debates.  It  was 
referred  to  the  Committee  on  Finance,  and  on  January  14, 
1890,  was  reported  back  with  amendments.  It  was  debated 
from  time  to  time  during  the  entire  session,  some  of  the  ablest 
members  of  the  Senate  taking  part  in  the  discussions.  Sena- 
tors Cullom,  Ingalls,  Allison,  Dawes,  Teller,  Reagan,  Hoar, 


SHERMAN   ANTI-TRUST   LAW  237 

Spooner,  Gray,  Gorman  and  Wilson,  besides  the  introducer  of 
the  bill,  engaged  in  the  debate.  These  debates  took  a  wide 
range  and  their  record  fills  upwards  of  220  pages  of  the  Con- 
gressional Record.  At  an  early  stage  in  the  discussions,  Mr. 
Sherman  in  a  carefully  prepared  speech  explained  the  objects 
of  his  bill : 

"It  declares,"  he  said,  "that  certain  contracts  are  against  public 
policy,  null  and  void.  It  does  not  announce  a  new  principle  of  law, 
but  applies  old  and  well  recognized  principles  of  the  common  law  to 
the  complicated  jurisdiction  of  our  State  and  Federal  Government. 
Similar  contracts  in  any  State  in  the  Union  are  now,  by  common  or 
statute  law,  null  and  void.  Each  State  can  and  does  prevent  and 
control  combinations  within  the  limit  of  the  State.  This  we  do  not 
propose  to  interfere  with.  The  power  of  the  State  courts  has  been 
repeatedly  exercised  to  set  aside  such  combinations,  as  I  shall  here- 
after show,  but  these  courts  are  limited  in  their  jurisdiction  to  the 
State,  and,  in  our  complex  system  of  government,  are  admitted  to  be 
unable  to  deal  with  the  great  evil  that  now  threatens  us. 

"Unlawful  combinations,  unlawful  at  common  law,  now  extend  to 
all  the  States  and  interfere  with  our  foreign  and  domestic  commerce 
and  with  the  importation  and  sale  of  goods  subject  to  duty  under  the 
laws  of  the  United  States,  against  which  only  the  general  government 
can  secure  relief.  They  not  only  affect  our  commerce  with  foreign 
nations,  but  trade  and  transportation  among  the  several  States.  The 
purpose  of  this  bill  is  to  enable  the  courts  of  the  United  States  to  apply 
the  same  remedies  against  combinations  which  injuriously  affect  the 
interests  of  the  United  States  that  have  been  applied  in  the  several 
States  to  protect  local  interests." 

It  is  important  to  note  this  statement  at  the  outset,  because 
through  all  the  varying  forms  which  the  bill  took  until  its  final 
enactment,  the  end  sought  by  the  lawmakers  was  always  that 
thus  expressed  by  Senator  Sherman.  Continuing  his  argument, 
he  made  another  statement,  which  so  clearly  expresses  the  evil 
against  which  the  legislation  was  directed,  that  I  may  perhaps 
be  pardoned  if  I  reproduce  it  here  in  full,  as  furnishing  a  clear 
description  of  that  mischief  which  the  old  Federal  law  was 
powerless  to  remedy,  and  to  meet  which  the  new  law  was  de- 


238  SHERMAN   ANTI-TRUST   LAW 

signed;  thus  following  the  time-honored  rule  laid  down  by 
Blackstone  for  the  construction  of  statutes.  Senator  Sherman 
devoted  some  time  to  stating  what  his  bill  did  not  pretend  to 
accomplish.  He  said  it  did  not  interfere  with  any  lawful  busi- 
ness in  the  United  States,  whether  conducted  by  a  corporation 
or  a  partnership  or  an  individual.  It  dealt,  he  said : 

"Only  with  unlawful  combinations,  unlawful  by  the  code  of  any 
law  of  any  civilized  nation  of  ancient  or  modern  times." 

"But,"  he  continued,  "associated  enterprise  and  capital  are  not 
satisfied  with  partnerships  and  corporations  competing  with  each 
other,  and  have  invented  a  new  form  of  combination,  commonly 
called  trusts,  that  seeks  to  avoid  competition  by  combining  the  con- 
trolling corporations,  partnerships  and  individuals  engaged  in  the 
same  business,  and  placing  the  power  and  property  of  the  combination 
under  the  government  of  a  few  individuals,  and  often  under  the  con- 
trol of  a  single  man  called  a  trustee,  a  chairman  or  a  president. 

"The  sole  object  of  such  a  combination  is  to  make  competition  im- 
possible It  can  control  the  market,  raise  or  lower  prices,  as  will 
best  promote  its  selfish  interests,  reduce  prices  in  a  particular  locality 
and  break  down  competition  and  advance  prices  at  will  where  com- 
petition does  not  exist.  Its  governing  motive  is  to  increase  the  profits 
of  the  parties  composing  it.  The  law  of  selfishness,  uncontrolled  by 
competition,  compels  it  to  disregard  the  interest  of  the  consumer.  It 
dictates  terms  to  transportation  companies,  it  commands  the  price  of 
labor  without  fear  of  strikes,  for  in  its  field  it  allows  no  competitors. 
Such  a  combination  is  far  more  dangerous  than  any  heretofore  in- 
vented, and,  when  it  embraces  the  great  body  of  all  the  corporations 
engaged  in  a  particular  industry  in  all  of  the  States  of  the  Union,  it 
tends  to  advance  the  price  to  the  consumer  of  any  article  produced,  it 
is  a  substantial  monopoly  injurious  to  the  public,  and,  by  the  rule  of 
both  the  common  and  the  civil  law,  is  null  and  void  and  the  just  sub- 
ject of  restraint  by  the  courts,  of  forfeiture  of  corporate  rights  and 
privileges,  and  in  some  cases  should  be  denounced  as  a  crime,  and  the 
individuals  engaged  in  it  should  be  punished  as  criminals.  It  is  this 
kind  of  a  combination  we  have  to  deal  with  now. 

"If  the  concentered  powers  of  this  combination  are  intrusted  to  a 
single  man,  it  is  a  kingly  prerogative,  inconsistent  with  our  form  of 
government,  and  should  be  subject  to  the  strong  resistance  of  the 
State  and  national  authorities.  If  anything  is  wrong  this  is  wrong. 
If  we  will  not  endure  a  king  as  a  political  power  we  should  not  endure 


SHERMAN  ANTI-TRUST   LAW  239 

a  king  over  the  production,  transportation  and  sale  of  any  of  the 
necessaries  of  life.  If  we  would  not  submit  to  an  emperor  we  should 
not  submit  to  an  autocrat  of  trade,  with  power  to  prevent  competition 
and  to  fix  the  price  of  any  commodity.  If  the  combination  is  con- 
fined to  a  State  the  State  should  apply  the  remedy ;  if  it  is  interstate 
and  controls  any  production  in  many  States,  Congress  must  apply 
the  remedy." 

As  examples  of  the  combination  against  which  the  legislation 
was  directed,  Senator  Sherman  referred  to  the  Standard  Oil 
combination,  the  Diamond  Match  Company,  the  Chicago  Gas 
Company,  the  Sugar  Trust,  etc. 

After  a  very  extensive  debate,  in  which  a  number  of  objec- 
tions to  the  bill  as  framed  were  pointed  out  by  different  Sena- 
tors, the  bill  was,  on  March  27,  1890,  committed  to  the 
Committee  on  the  Judiciary,  from  which,  on  April  2,  it  was 
reported  back  in  substantially  the  same  form  in  which  it  was 
later  enacted.  It  was  debated  on  April  2  and  April  8,  during 
which  Senator  Hoar,  Chairman  of  the  Judiciary  Committee, 
reiterated  his  statement  that, 

"The  great  thing  that  this  bill  does,  except  affording  a  remedy,  is  to 
extend  the  common-law  principles,  which  protected  fan*  competition 
in  trade  in  old  times  in  England,  to  international  and  interstate  com- 
merce in  the  United  States." 

On  April  8,  1890,  the  bill  was  passed  by  the  Senate  by  a 
vote  of  52  to  1.  It  came  up  for  consideration  in  the  House  of 
Representatives  on  May  1,  1890,  in  the  form  in  which  it 
passed  the  Senate,  and  was  debated  on  that  and  on  subsequent 
days.  It  was  passed  in  a  somewhat  different  form  from  the 
Senate  bill,  went  to  conference,  and  after  disagreement  and 
report  to  each  house  upon  the  disagreement,  it  was  again  re- 
ferred back,  debated,  recommitted,  re-referred,  and  finally,  on 
June  20,  1890,  the  House  accepted  the  bill  as  it  had  passed  the 
Senate.  On  July  2,  1890,  it  was  signed  by  the  President. 

As  so  enacted,  the  act,  which  is  entitled,  "An  Act  to  protect 
trade  and  commerce  against  unlawful  restraints  and  monopo- 


240  SHERMAN   ANTI-TRUST   LAW 

lies,"  contains  eight  sections.  The  first  declares  to  be  illegal 
"  every  contract,  combination  in  the  form  of  trust  or  otherwise, 
or  conspiracy,  in  restraint  of  trade,  or  commerce  among  the 
several  States,  or  with  foreign  nations/'  and  every  person  who 
shall  make  any  such  contract  or  engage  in  any  such  combination 
or  conspiracy,  to  be  guilty  of  a  misdemeanor  and  liable  to  fine 
and  imprisonment.  The  second  section  provides  that  "Every 
person  who  shall  monopolize,  or  attempt  to  monopolize,  or 
combine,  or  conspire  with  any  other  person  or  persons,  to 
monopolize  any  part  of  the  trade  or  commerce  among  the 
several  States  or  with  foreign  nations,  shall  be  deemed  guilty 
of  a  misdemeanor,"  and  liable  to  fine  and  imprisonment.  By 
the  fourth  section,  the  several  Circuit  Courts  of  the  United 
States  are  invested  with  jurisdiction  "to  prevent  and  restrain 
violations  of  this  act,"  and  it  is  made  the  duty  of  the  several 
district  attorneys,  under  the  direction  of  the  Attorney-General, 
to  institute  proceedings  in  equity  to  prevent  and  restrain  such 
violations.  By  the  seventh  section,  a  right  of  action  is  given 
to  any  person  who  shall  be  injured  in  his  interests  or  property 
by  any  other  person  or  corporation  by  reason  of  anything  for- 
bidden or  declared  to  be  unlawful  by  the  act,  to  sue  therefore 
in  any  Circuit  Court  of  the  United  States  in  the  district  in 
which  the  defendant  may  reside  or  be  found,  without  respect 
to  the  amount  in  controversy,  and  to  recover  threefold  the 
damages  sustained  by  him  and  the  costs  of  suit,  including  a 
reasonable  attorney's  fee. 

Shortly  after  the  passage  of  this  act,  a  petition  was  filed  by 
the  United  States  in  the  Circuit  Court  at  Philadelphia,  attack- 
ing certain  contracts  made  by  one  Searles  on  behalf  of  the 
American  Sugar  Refining  Company  for  the  purchase  of  four 
separate  refineries  in  the  City  of  Philadelphia,  by  which  con- 
tracts, it  was  alleged,  the  American  Sugar  Refining  Company 
secured  control  of  96  per  cent  of  all  the  manufactories  of  sugar 
in  the  United  States.  The  bill  prayed  for  the  rescission  of  these 
contracts.  District  Judge  Butler,  in  dismissing  the  bill,  said : 


SHERMAN   ANTI-TRUST   LAW  241 

"The  contracts  and  acts  of  the  defendants  relate  exclusively  to  the 
acquisition  of  sugar  refineries  and  the  business  of  sugar  refining  in 
Pennsylvania.  They  have  no  reference  and  bear  no  relation  to  com- 
merce between  the  States  or  with  foreign  nations.  ...  It  is  the 
stream  of  commerce  flowing  across  the  States  and  between  them  and 
foreign  nations  that  Congress  is  authorized  to  regulate.  To  prevent 
direct  interference  with,  or  disturbance  of,  this  flow  alone  was  the 
power  granted  to  the  Federal  Government." 

Upon  this  finding  of  fact,  the  bill  was  dismissed,  and  on 
appeal,  the  Supreme  Court,  Justice  Harlan  alone  dissenting, 
approved  the  action  of  the  trial  judge,  and  treating  the  whole 
question  to  be  whether,  conceding  that  the  execution  of  these 
contracts  and  the  conveyance  to  the  American  Sugar  Refining 
Company  pursuant  thereto  of  the  four  refineries  embraced 
therein,  would  give  the  Sugar  Company  a  monopoly  in  manu- 
facture, held  that  a  monopoly  of  such  manufacture  could  not 
be  directly  suppressed  under  the  act  of  Congress  in  the  mode 
attempted  by  the  bill,  because,  while  the  power  to  control  the 
manufacture  of  a  given  thing  involves  in  a  certain  sense  the 
control  of  its  disposition,  this  is  a  secondary  and  not  a  primary 
sense,  for  although  the  exercise  of  that  power  might  result  in 
bringing  the  operation  of  commerce  into  play,  it  did  not  con- 
trol it,  but  affected  it  only  incidentally  and  indirectly.  There 
was  nothing  in  the  proofs,  said  Chief  Justice  Fuller,  in  writing 
the  opinion  of  the  court, 

"to  indicate  any  intention  to  put  a  restraint  upon  trade  or  commerce, 
and  the  fact,  as  we  have  seen,  that  trade  or  commerce  might  be  in- 
directly affected  was  not  enough  to  entitle  complainants  to  a  decree. 
The  subject  matter  of  the  sale  was  shares  of  manufacturing  stock, 
and  the  relief  sought  was  the  surrender  of  property  which  had  already 
passed  and  the  suppression  of  the  alleged  monopoly  in  manufacture 
by  the  restoration  of  the  status  quo  before  the  transfers."  l 

Justice  Harlan  based  his  dissent  upon  a  broader  inference 
from  the  facts,  contending  that  the  acts  of  the  defendant  must 

U56U.  S.  17,  34;  1895. 


242  SHERMAN   ANTI-TRUST   LAW 

be  regarded  as  indicating  a  distinct  intention  to  monopolize 
interstate  trade  and  commerce  in  sugar. 

"It  may  be  admitted,"  he  said,  "that  an  act  which  did  nothing 
more  than  forbid,  and  which  had  no  other  object  than  to  forbid,  the 
mere  refining  of  sugar  in  any  State,  would  be  in  excess  of  any  power 
granted  to  Congress.  But  the  act  of  1890  is  not  of  that  character. 
It  does  not  strike  at  the  manufacture  simply  of  articles  that  are  legiti- 
mate or  recognized  subjects  of  commerce,  but  at  combinations  that 
unduly  restrain,  because  they  monopolize,  the  buying  and  selling  of 
articles  which  are  to  go  into  interstate  commerce." 

He  summed  up  the  discussion  in  these  words : 

"Whatever  improperly  obstructs  the  free  course  of  interstate 
intercourse  and  trade,  as  involved  in  the  buying  and  selling  of  articles 
to  be  carried  from  one  State  to  another,  may  be  reached  by  Congress, 
under  its  authority  to  regulate  commerce  among  the  States.  The 
exercise  of  that  authority  so  as  to  make  trade  among  the  States,  in  all 
recognized  articles  of  commerce,  absolutely  free  from  unreasonable  or 
illegal  restrictions  imposed  by  combinations,  is  justified  by  an  express 
grant  of  power  to  Congress  and  would  redound  to  the  welfare  of  the 
whole  country.  I  am  unable  to  perceive  that  any  such  result  would 
imperil  the  autonomy  of  the  States,  especially  as  that  result  cannot  be 
attained  through  the  action  of  any  one  State. 

"Undue  restrictions  or  burdens  upon  the  purchasing  of  goods  in 
the  market  for  sale,  to  be  transported  to  other  States,  cannot  be  im- 
posed even  by  a  State  without  violating  the  freedom  of  commercial 
intercourse  guaranteed  by  the  Constitution.  But  if  a  State  within 
whose  limits  the  business  of  refining  sugar  is  exclusively  carried  on 
may  not  constitutionally  impose  burdens  upon  purchases  of  sugar  to 
be  transported  to  other  States,  how  comes  it  that  combinations  of 
corporations  or  individuals,  within  the  same  State,  may  not  be  pre- 
vented by  the  national  government  from  putting  unlawful  restraints 
upon  the  purchasing  of  that  article  to  be  carried  from  the  State  in 
which  such  purchases  are  made  ? "  l 

Justice  Harlan's  dissenting  opinion  has  finally  become  the 
law  of  the  court,  but,  for  the  time,  the  application  of  the  law 
received  a  severe  setback  by  this  decision  and  the  views  of 

U56U.  S.  37,  38;  1895. 


SHERMAN   ANTI-TRUST   LAW  243 

the  statute  entertained  by  the  other  Justices  as  expressed  by 
Chief  Justice  Fuller. 

Attorney  General  Harmon  reported  to  Congress,  in  1895, 
that  neither  combinations  nor  monopolies  could  be  reached 
under  the  Sherman  Act  "  simply  because  they  are  combinations 
and  monopolies,  nor  because  they  may  engage  in  interstate 
commerce  as  one  of  the  incidents  of  their  business  "  and,  in  the 
following  year,  he  told  Congress  that  the  restricted  scope  of 
the  provisions  of  the  Act,  as  they  had  been  construed  in  the 
Knight  Case,  "makes  amendment  necessary  if  any  effective 
action  is  expected  of  this  department."  1 

In  March,  1897,  the  Supreme  Court,  in  the  Trans-Missouri 
Freight  Association  Case,2  held  the  act  to  be  applicable  to  rail- 
road companies  and  that  it  made  illegal  a  traffic  association  by 
which  free  competition  between  competing  railroads  was  pre- 
vented ;  a  decision  which  was  reiterated  in  the  Joint  Traffic 
Association  Case 3  a  year  later.  In  each  of  those  cases  the 
opinion  was  written  by  Mr.  Justice  Peckham  and  expressed  a 
construction  of  the  law  which,  while  not  required  by  the  facts 
of  the  cases  before  the  court,  yet  gave  rise  to  a  school  of  literal 
construction  of  the  act  which  was  wholly  destructive  of  the 
original  intent  of  its  framers  and  in  effect  amounted  to  a  re- 
ductio  ad  absurdum  of  the  statute,  because  it  converted  a  meas- 
ure intended  to  prevent  unlawful  restraints  upon  commerce 
into  an  act  to  forbid  the  ordinary  contracts  essential  to  any 
healthy  conduct  of  commerce.  This  construction  was  squarely 
repudiated  by  the  Supreme  Court  when  it  was  presented  in  the 
Standard  Oil4  and  Tobacco  Cases.5  But  long  before  them,  in 
February,  1898,  the  Circuit  Court  in  the  Sixth  Circuit,  com- 
posed of  Justice  Harlan  and  Judges  Lurton  and  Taft,  the  latter 
writing  the  opinion,  gave  an  application  to  the  act  which  in 
some  measure  removed  the  blight  upon  its  effectiveness  result- 
ing from  the  Knight  Case,  by  holding  it  applicable  to  a  com- 

1  Attorney  Gen.  Rep.  (U.  S.),  1896,  p.  xxvii.     «  166  IT.  S.  290;  1897. 
3 171  U.  S.  505;  1898.     4  221  U.  S.  1;  1911.     •  Ibid.,  106;  1911. 


244  SHERMAN   ANTI-TRUST   LAW 

bination  of  corporations  manufacturing  iron  pipe  in  different 
States,  whereby  the  freedom  of  competition  among  them  in 
the  manufacture  and  sale  of  that  commodity  among  a  number 
of  Southern  States  was  suppressed.  Judge  Taft's  analysis  and 
history  of  the  English  Law  relating  to  unreasonable  restraints 
of  trade  is  one  of  the  most  exhaustive  and  accurate  summaries 
of  the  subject  to  be  found  in  the  books.  His  analysis  of  the 
Knight  Case1  restricted  the  application  of  that  decision  sub- 
stantially as  it  was  subsequently  restricted  by  the  Supreme 
Court. 

"It  seems  to  us  clear,"  he  said,  "that,  from  the  beginning  to  the 
end  of  the  opinion,  the  Chief  Justice  draws  the  distinction  between  a 
restraint  upon  the  business  of  manufacturing  and  a  restraint  upon 
the  trade  or  commerce  between  the  States  in  the  articles  after  manu- 
facture, with  the  manifest  purpose  of  showing  that  the  regulating 
power  of  Congress  under  the  Constitution  could  affect  only  the  latter, 
while  the  former  was  not  under  Federal  control,  and  rested  wholly 
with  the  States.  .  .  .  The  subject  matter  of  the  restraint  here  was  not 
articles  of  merchandise  or  their  manufacture,  but  contracts  for  sale  of 
such  articles  to  be  delivered  across  State  lines,  and  the  negotiations  and 
bids  preliminary  to  the  making  of  such  contracts,  all  of  which,  as  we 
have  seen,  do  not  merely  affect  interstate  commerce,  but  are  interstate 
commerce.  It  can  hardly  be  said  that  a  combination  in  restraint  of 
what  is  interstate  commerce  does  not  directly  affect  and  burden  that 
commerce.  The  error  into  which  the  Circuit  Court  fell,  it  seems  to 
us,  was  in  not  observing  the  difference  between  the  regulating  power 
of  Congress  over  contracts  and  negotiations  for  sales  of  goods  to  be 
delivered  across  State  lines,  and  that  over  the  merchandise,  the  sub- 
ject of  such  sales  and  negotiations.  The  goods  are  not  within  the 
control  of  Congress  until  they  are  in  actual  transit  from  one  State  to 
another.  But  the  negotiations  and  making  of  sales  which  necessarily 
involve  in  their  execution  the  delivery  of  merchandise  across  State 
lines  are  interstate  commerce,  and  so  within  the  regulating  power  of 
Congress  even  before  the  transit  of  the  goods  in  performance  of  the 
contract  has  begun." 

This  decision  was  unanimously  affirmed  by  the  Supreme 
Court,2  Justice  Peckham  writing  the  opinion,   in  which  he 

1  85  Fed.  297;  1898.  2  175  U.  S.  225;  1899. 


SHERMAN   ANTI-TRUST   LAW  245 

stated  that  the  court  was  of  the  opinion  that  the  direct  effect 
of  the  agreement  or  combination  under  consideration  was  to 
regulate  interstate  commerce,  and,  therefore,  that  the  case  was 
not  covered  by  the  decision  in  United  States  v.  Knight.1 

"The  direct  purpose  of  the  combination  in  the  Knight  Case,"  he 
said,  "was  the  control  of  the  manufacture  of  sugar.  There  was  no 
combination  or  agreement,  in  terms,  regarding  the  future  disposition 
of  the  manufactured  article ;  nothing  looking  to  a  transaction  in  the 
nature  of  interstate  commerce.  The  probable  intention  on  the  part 
of  the  manufacturer  of  the  sugar  to  thereafter  dispose  of  it  by  send- 
ing it  to  some  market  in  another  State,  was  held  to  be  immaterial 
and  not  to  alter  the  character  of  the  combination.  The  various  cases 
which  had  been  decided  in  this  Court  relating  to  the  subject  of  inter- 
state commerce,  and  to  the  difference  between  that  and  the  manu- 
facture of  commodities,  and  also  the  police  power  of  the  States  as 
affected  by  the  commerce  clause  of  the  Constitution,  were  adverted 
to,  and  the  case  was  decided  upon  the  principle  that  a  combination 
simply  to  control  manufacture  was  not  a  violation  of  the  act  of  Con- 
gress, because  such  a  contract  or  combination  did  not  directly  con- 
trol or  affect  interstate  commerce,  but  that  contracts  for  the  sale  and 
transportation  to  other  States  of  specific  articles  were  proper  subjects 
for  regulation  because  they  did  form  part  of  such  commerce." 

On  the  other  hand,  he  agreed  with  the  court  below  that  the 
combination  of  the  pipe  manufacturers  did  involve  contracts 
of  the  nature  last  mentioned,  not  incidentally  or  collaterally,  but 
as  a  direct  and  immediate  result  of  the  combination  engaged  in 
by  the  defendants. 

The  Court  of  Appeals  in  the  Second  Circuit,  in  December, 
1908,  in  a  suit  brought  by  the  Pennsylvania  Sugar  Refining 
Company  against  the  American  Sugar  Refining  Company  and 
its  directors,  distinguished  the  Knight  Case  substantially  as  was 
done  in  the  Addyston  Pipe  Case.2  The  complaint  there  alleged 
that  the  defendants  conspired  to  prevent  the  plaintiff  from 
reengaging  in  the  business  of  importing  raw  sugar  from  other 
states  and  foreign  countries  into  the  State  of  Pennsylvania, 
there  manufacturing  it  into  refined  sugar,  and  exporting  the 

»  156  U.  S.  1 ;  1895.  2 166  Fed.  254 ;  1908. 


246  SHERMAN  ANTI-TRUST   LAW 

manufactured  product  to  other  States  and  countries,  and  that 
they  accomplished  their  object  by  inducing  one  who  indirectly 
held  the  controlling  stock  interest  in  the  plaintiff  corporation, 
to  accept  a  loan  of  a  large  sum  of  money  and  turn  over  to  them 
such  interest  with  the  voting  power  attached,  which  they  exer- 
cised to  elect  new  directors,  whom  they  caused  to  vote  that  the 
plaintiff  should  do  no  business.  The  Court,  speaking  by  Judge 
Noyes,  said : 

"A  comparison  of  the  Knight  Case  with  the  case  at  bar  shows 
some  striking  superficial  resemblances.  Both  related  to  actions  of  the 
American  Sugar  Refining  Company  in  obtaining  control  of  independent 
sugar  refining  companies  in  Philadelphia.  But  there  is  this  funda- 
mental distinction  between  them :  The  one  was  an  agreement  for  the 
restriction  of  competition  which  related  directly  to  manufacture  and 
only  indirectly  to  interstate  commerce;  the  other  was  a  conspiracy 
to  prevent  a  manufacturer  from  engaging  in  business  which  necessarily 
directly  restrained  interstate  commerce.  .  .  .  The  decision  in  the 
Knight  Case  was  that  upon  the  proofs  the  agreements  there  in  question 
related  to  manufacture  —  to  production  —  and  were  not  in  restraint 
of  interstate  commerce,  although  they  may  have  affected  such  com- 
merce incidentally  and  indirectly.  But  there  was  present  in  this  case 
that  which  Mr.  Chief  Justice  Fuller  said  was  absent  in  the  Knight  Case  : 

"'There  was  nothing  in  the  proofs  to  indicate  any  intention  to  put 
a  restraint  upon  trade  or  commerce,  and  the  fact,  as  we  have  seen, 
that  trade  or  commerce  might  be  indirectly  affected,  was  not  enough 
to  entitle  complainants  to  a  decree.' 

******* 

"It  must  be  clearly  borne  in  mind  that  the  defendants  in  this  case 
are  not  charged  simply  with  preventing  the  plaintiff  from  engaging  in 
a  manufacturing  business.  If  they  were,  the  Knight  decision  would 
undoubtedly  be  applicable.  They  are  expressly  charged  also  with 
preventing  the  plaintiff  from  engaging  in  interstate  commerce  —  with 
preventing  the  importation  of  raw  materials  and  the  exportation  of 
the  manufactured  product.  .  .  .  The  purpose  of  the  conspiracy  in 
the  present  case  was  not  only  to  obtain  control  of  the  plaintiff  cor- 
poration and  thus  doubtless  acquire  a  monopoly,  but  to  exercise  the 
power  of  control  so  obtained  to  wholly  prevent  the  plaintiff  from 
engaging  in  a  business,  the  carrying  on  of  which  necessarily  involved 
interstate  commerce." 


SHERMAN   ANTI-TRUST   LAW  247 

The  court  held  that  the  principles  of  the  Addyston  Pipe  Case,1 
distinguishing  the  Knight  Case,  were  directly  applicable,  and 
that,  because  the  conspiracy  charged  in  the  complaint  did  not 
relate  wholly  to  production  within  the  State  of  Pennsylvania, 
the  case  was  not  controlled  by  the  Knight  decision. 

It  seems  incredible  that  after  the  decision  in  the  Addyston 
Pipe  Case  1  anybody  should  have  assumed  that  the  decision  of 
the  Knight  Case  would  protect  from  the  operation  of  the  Sher- 
man Law  any  combination  or  agreement  which  directly  sup- 
pressed competition  between  persons  engaged  in  the  manufac- 
ture and  sale  of  merchandise  among  the  several  States,  or  that 
it  could  be  relied  upon  to  protect  anything  more  than  the  very  rare 
case  of  a  combination  between  persons  or  corporations  engaged 
wholly  in  manufacturing  and  selling  within  a  single  State. 
Nevertheless,  those  who  wished  to  centralize  control  over  manu- 
factured products  by  various  forms  of  agreement  or  corporate 
ownership  clung  to  the  Knight  Case  as  the  rock  of  their  salva- 
tion, until  the  Chief  Justice  in  the  Standard  Oil  opinion  forever 
disposed  of  it  in  a  few  brief  words. 

The  next  stage  in  the  development  of  the  Sherman  Law  was 
reached  in  April,  1903,  when  the  United  States  Circuit  Court 
in  the  Eighth  Circuit,  by  the  unanimous  vote  of  all  four  Cir- 
cuit Judges,  held  the  act  to  be  applicable  to  the  Northern 
Securities  Company,  a  New  Jersey  corporation  which  had 
acquired  control  of  the  stock  of  the  Northern  Pacific  and  the 
Great  Northern  Railway  Companies,  thereby  placing  it  in 
the  power  of  the  Securities  Company  to  suppress  competition 
between  those  two  competing  and  parallel  lines  of  railroad  en- 
gaged in  interstate  commerce ;  a  decision  which  was  affirmed 
by  the  Supreme  Court  in  March,  1904,2  by  a  bare  majority  of 
the  Court.  Justice  Harlan  wrote  the  principal  opinion  in  sup- 
port of  the  affirmance,  and  Justice  Brewer  filed  an  opinion 
which,  while  concurring  with  Justice  Harlan  in  the  result 
expressed,  dissented  from  some  of  the  reasoning  of  his  opinion. 

1  See  supra.  *  193  U.  S.  197 ;  1904. 


248  SHERMAN   ANTI-TRUST   LAW 

He  recorded  the  fact  that  he  had  been  with  the  majority  of  the 
Court  in  the  decision  of  the  Freight  Association  and  Joint  Traffic 
Cases  and  in  the  Addyston  Pipe  &  Steel  Company  Case,  and  that 
while  subsequent  discussion  and  consideration  had  not  dis- 
turbed his  conviction  that  those  cases  were  rightly  decided, 
he  did  think  that  in  some  respects  the  reasons  given  for  the 
judgments  could  not  be  sustained. 

"Instead  of  holding  that  the  Antitrust  Act,"  he  said,  "included 
all  contracts,  reasonable  or  unreasonable,  in  restraint  of  interstate 
trade,  the  ruling  should  have  been  that  the  contracts  there  presented 
were  unreasonable  restraints  of  interstate  trade  and  as  such  within 
the  scope  of  the  act.  That  act  as  appears  from  its  title,  was  leveled 
at  only  'unlawful  restraints  and  monopolies.'  Congress  did  not  in- 
tend to  reach  and  destroy  those  minor  contracts  in  partial  restraint 
of  trade  which  the  long  course  of  decisions  at  common  law  had  affirmed 
were  reasonable  and  ought  to  be  upheld.  The  purpose  rather  was  to 
place  a  statutory  prohibition,  with  prescribed  penalties  and  remedies, 
upon  those  contracts  which  were  in  direct  restraint  of  trade,  unreason- 
able and  against  public  policy.  Whenever  a  departure  from  common 
law  rules  and  definitions  is  claimed,  the  purpose  to  make  the  depar- 
ture should  be  clearly  shown."  1 

The  important  point  of  the  decision  in  this  case  was,  that  no 
matter  in  what  form  an  undue  restraint  upon  interstate  com- 
merce was  imposed,  the  Sherman  Act  invalidated  it  and  the 
Federal  equity  courts  would  penetrate  corporate  organization 
as  well  as  as  any  other  kind  of  contract,  and  require  the  re- 
straint to  be  ended.  Whether  the  undue  control  over  com- 
merce were  accomplished  by  agreement  between  separate  in- 
dividuals or  corporations,  or  by  vesting  the  capital  stocks  of 
competing  corporations  in  a  third  separate  corporation,  the 
Sherman  Law  enabled  a  Federal  court  of  equity  to  require 
the  combination  to  be  ended  and  competitive  conditions  re- 
stored. 

Finally,  the  last  step  in  the  authoritative  construction  and 
application  of  the  law  was  taken  in  the  epoch-making  decisions 

*  193  U.  S.  361 ;  1904. 


SHERMAN   ANTI-TRUST   LAW  249 

in  the  cases  against  the  Standard  Oil  Company  and  the 
American  Tobacco  Company,  decided  in  May,  1911.  These 
cases  are  so  recent  and  so  well  known  to  the  bar  as  to  require 
but  little  comment  here.  In  them,  the  Supreme  Court  for  the 
first  time  gave  thorough  consideration  to  the  second  section 
of  the  act,  which  is  directed  against  attempts  to  monopolize 
interstate  trade  or  commerce.  The  gravamen  of  the  decision 
in  each  case  was  that  in  determining  the  meaning  of  the  words 
"  every  contract,  combination  in  the  form  of  trust  or  otherwise, 
or  conspiracy  in  restraint  of  trade  or  commerce,"  the  history  of 
those  terms  as  they  were  used  in  the  law  before  the  enactment 
must  be  considered ;  that  the  language  of  the  act,  all  compre- 
hensive as  it  is,  must  be  given  a  reasonable  construction,  not 
such  a  narrow  verbal  one  as  would  entirely  destroy  the  purpose 
for  which  the  law  was  enacted.  Curiously  enough,  Justice 
Harlan,  who  had  advocated  precisely  this  interpretation  in  his 
dissenting  opinion  in  the  Knight  Case  seventeen  years  previously, 
dissented  from  this  conclusion,  and  in  vigorous  opinions  urged 
the  adoption  of  a  literal  construction;  while  the  language  em- 
ployed by  the  Chief  Justice  in  the  prevailing  opinions  was 
seized  upon  by  hostile  critics  for  the  purpose  of  convincing  the 
public  that  some  new,  strange  and  artificial  construction  had 
been  adopted,  the  effect  of  which  would  be  to  emasculate  the 
act.  Yet,  as  Judge  Lanning  said  in  writing  the  opinion  of  the 
Court  in  the  Third  Circuit  in  the  Powder  Trust  Case  (E.  I.  du 
Pont  de  Nemours  &  Company)1  decided  very  shortly  after  the 
Standard  Oil  and  Tobacco  Cases: 

"From  early  times  it  has  been  a  rule  of  the  courts  not  to  construe 
a  legislative  act  in  a  literal  manner,  where  it  is  clear  that  by  such 
construction  the  legislative  purpose  will  be  defeated ;  .  .  .  "  and 

"The  recent  decisions  of  the  Supreme  Court  in  Standard  Oil  Co.  v. 
United  States,  and  American  Tobacco  Co.  v.  United  States,  make  it 
quite  clear  that  the  language  of  the  Antitrust  Act  is  not  to  receive 
that  literal  construction  which  will  impair  rather  than  enhance  free- 
dom of  interstate  commerce." 

i  188  Fed.  149;  1911. 


250  SHERMAN   ANTI-TRUST   LAW 

That  Judge  Lanning  correctly  interpreted  the  decisions  of 
the  Supreme  Court  was  in  effect  declared  by  that  tribunal 
itself  in  the  following  year  in  Nash  v.  United  States,1  where 
referring  to  the  Oil  and  Tobacco  Cases,  the  court  said,  speak- 
ing by  Justice  Holmes : 

"Those  cases  may  be  taken  to  have  established  that  only  such  con- 
tracts and  combinations  are  within  the  act  as  by  reason  of  intent  or 
the  inherent  nature  of  the  contemplated  acts  prejudice  the  public 
interests  by  unduly  restricting  competition  or  unduly  obstructing  the 
course  of  trade." 

In  the  opinion  in  the  Union  Pacific  Case,2  the  court  summed 
up  as  follows : 

"In  the  recent  discussion  of  the  history  and  meaning  of  the  act  in 
the  Standard  Oil  and  Tobacco  Cases  this  court  declared  that  the 
statute  should  be  given  a  reasonable  construction  with  a  view  to 
reaching  those  undue  restraints  of  interstate  trade  which  are  intended 
to  be  prohibited  and  punished." 

Thus,  after  a  lapse  of  more  than  twenty  years,  did  the  court 
declare  as  a  principle  of  construction,  the  rule  stated  by  Sena- 
tor Hoar  in  closing  the  debate  upon  the  bill  in  the  Senate  in 
April,  1890,  when  he  said : 

"The  common  law  in  the  States  of  the  Union,  of  course,  extends 
over  citizens  and  subjects  over  which  the  State  itself  has  jurisdiction. 
Now,  we  are  dealing  with  an  offense  against  interstate  or  international 
commerce  which  the  State  cannot  regulate  by  penal  enactment  and 
we  find  the  United  States  without  any  common  law.  The  great  thing 
that  this  bill  does,  except  affording  a  remedy,  is  to  extend  the  com- 
mon-law principles  which  protected  fair  competition  in  trade  in  old 
times  in  England  to  international  and  interstate  commerce  in  the 
United  States." 

It  would  extend  this  paper  far  beyond  its  necessary  limits 
to  consider  at  length  the  nature  of  the  evidence  upon  which 
courts  have  held  combinations  of  one  kind  or  another  to  offend 
against  the  prohibition  of  the  Sherman  Act. 

1  229  U.  S.  373,  376;  1913.  «  226  U.  S.  61;  1912. 


SHERMAN   ANTI-TRUST   LAW  251 

Justice  Holmes,  in  the  philosophical  analysis  of  the  Sherman 
Law  contained  in  his  dissenting  opinion  in  the  Northern  Securi- 
ties Case,1  speaks  of  the  sweeping  general  character  of  the 
statute  and  says : 

"It  hits  'every'  contract  or  combination  of  the  prohibited  sort, 
great  or  small,  and  'every'  person  who  shall  monopolize  or  attempt  to 
monopolize,  in  the  sense  of  the  act,  'any  part'  of  the  trade  or  com- 
merce among  the  several  States.  There  is  a  natural  inclination  to 
assume  that  it  was  directed  against  certain  great  combinations,  and 
to  read  it  in  that  light.  It  does  not  say  so.  On  the  contrary,  it  says 
'every'  and  'any  part.'  .  .  .  According  to  popular  speech,  every 
concern  monopolizes  whatever  business  it  does,  and  if  that  business 
is  trade  between  two  States  it  monopolizes  a  part  of  the  trade  among 
the  States.  Of  course,  the  statute  does  not  forbid  that.  It  does  not 
mean  that  all  business  must  cease.  A  single  railroad  down  a  narrow 
valley  or  through  a  mountain  gorge  monopolizes  all  the  railroad  trans- 
portation through  that  valley  or  gorge.  Indeed,  every  railroad  mo- 
nopolizes, in  a  popular  sense,  the  trade  of  some  area.  Yet  I  suppose 
no  one  would  say  that  the  statute  forbids  a  combination  of  men  into 
a  corporation  to  build  and  run  such  a  railroad  between  the  States.  .  .  . 
Size  has  nothing  to  do  with  the  matter.  A  monopoly  of  'any  part'  of 
commerce  among  the  States  is  unlawful.  .  .  .  But  the  act  of  Con- 
gress will  not  be  construed  to  mean  the  universal  disintegration  of 
society  into  single  men,  each  at  war  with  all  the  rest,  or  even  the  pre- 
vention of  all  further  combinations  for  a  common  end. 

"There  is  a  natural  feeling  that  somehow  or  other  the  statute 
meant  to  strike  at  combinations  great  enough  to  cause  just  anxiety 
on  the  part  of  those  who  love  their  country  more  than  money,  while 
it  viewed  such  little  ones  as  I  have  supposed  with  just  indifference. 
This  notion,  it  may  be  said,  somehow  breathes  from  the  pores  of  the 
act,  though  it  seems  to  be  contradicted  in  every  way  by  the  words 
in  detail.  And  it  has  occurred  to  me  that  it  might  be  that  when  a 
combination  reached  a  certain  size  it  might  have  attributed  to  it  more 
of  the  character  of  a  monopoly  merely  by  virtue  of  its  size  than  would 
be  attributed  to  a  smaller  one.  I  am  quite  clear  that  it  is  only  in 
connection  with  monopolies  that  size  could  play  any  part." 

But  he  goes  on  to  say,  after  examples  regarding  railroads, 
that  the  very  words  of  the  act  made  such  a  distinction  im- 
possible in  the  instant  case. 

'193U.  S.  402;  1904. 


252  SHERMAN   ANTI-TRUST   LAW 

This  question  of  size  effected  a  lodgment  in  the  public  mind, 
although  every  court  in  construing  the  act  has  repudiated 
mere  size  as  a  criterion  of  legality.  Thus,  in  the  Standard  Oil 
Case,  the  opinion  of  the  Chief  Justice  dwelt  upon  the  fact  that 
the  vast  capital  aggregated  by  combining  in  the  New  Jersey 
corporation  the  stocks  of  so  many  other  corporations,  gave  rise 
to  a  prima  facie  presumption  of  intent  and  purpose  to  maintain 
a  dominancy  over  the  oil  industry,  "  not  as  a  result  of  normal 
methods  of  industrial  development,  but  by  new  means  of  com- 
bination which  were  resorted  to  in  order  that  greater  power 
might  be  added  than  would  otherwise  have  arisen  had  normal 
methods  been  followed,  the  whole  with  the  purpose  of  exclud- 
ing others  from  the  trade  and  thus  centralizing  in  the  combina- 
tion a  perpetual  control  of  the  movements  of  petroleum  and  its 
products  in  the  channels  of  interstate  commerce." 

And  in  the  Tobacco  Case,1  the  court,  reviewing  the  history  of 
the  combination,  held  the  conclusion  of  monopolistic  purpose 
to  be  inevitable,  "not  because  of  the  vast  amount  of  property 
aggregated  by  the  combination,  not  because  alone  of  the  many 
corporations  which  the  proof  shows  were  united  by  resort  to 
one  device  or  another.  Again,  not  alone  because  of  the  do- 
minion and  control  over  the  tobacco  trade  which  actually 
exists,  but  because  we  think  the  conclusion  of  wrongful  pur- 
pose and  illegal  combination  is  overwhelmingly  established  by" 
the  various  considerations  summarized  in  the  opinion. 

Judge  Noyes,  in  passing  upon  the  plan  of  dissolution  of  the 
American  Tobacco  Company  in  the  Circuit  Court,  Southern 
District  of  New  York,2  said : 

"The  Supreme  Court  did  not  condemn  the  combination  on  account 
of  the  great  amount  of  property  which  it  had  acquired.  Indeed,  it 
must  now  be  accepted  that  magnitude  of  business  in  and  of  itself 
does  not  constitute  unlawful  monopoly,  as  least  up  to  the  point  where 
economy  of  production  and  management  are  thereby  promoted. 
There  must  be  something  more  —  some  unlawful  or  oppressive  act  or 

1  221  U.  S.  182;  1911.  s  191  Fed.  371,  387;  1911. 


SHERMAN   ANTI-TRUST   LAW  253 

purpose  in  acquiring  the  business  or  after  its  acquisition  —  to  come 
within  the  condemnation  of  the  statute." 

In  United  States  v.  International  Harvester  Co.1  Judge  Smith 
said : 

"There  is  no  limit  under  the  American  law  to  which  a  business 
may  not  independently  grow,  and  even  a  combination  of  two  or  more 
businesses,  if  it  does  not  unreasonably  restrain  trade  is  not  illegal." 

In  the  recent  decision  of  the  four  Circuit  Judges  of  the  Third 
Circuit  in  the  Government's  suit  against  the  United  States 
Steel  Corporation  2  Judge  Buffington  says,  after  a  review  of  the 
evidence  concerning  the  size  of  the  business  carried  on  by  the 
defendant : 

"These  significant  figures  prove  that  mere  size  or  bigness  of  busi- 
ness is  not  necessarily  a  monopoly  of  business  at  the  expense  of  all 
others  engaged  in  it.  And  in  that  connection  and  as  aptly  expressive 
of  our  views  we  may  quote  with  approval  the  language  of  Judge 
Hook  of  the  Eighth  Circuit  in  his  concurring  opinion  in  the  Standard 
Oil  Case,3 

'"Success  and  magnitude  of  business,  the  rewards  of  fair  and  honor- 
able endeavor  were  not  among  the  evils  which  threatened  the  public 
welfare  and  attracted  the  attention  of  Congress,  but  when  they  had 
been  obtained  by  wrongful  or  unlawful  methods  and  competition  has 
been  crippled  or  destroyed,  the  elements  of  monopoly  are  present.' " 

In  the  debate  on  the  bill  in  the  United  States  Senate  in 
April,  1890,  Senator  Kenna  asked  whether  the  Judiciary  Com- 
mittee intended  by  the  use  of  the  words  "every  person  who 
shall  monopolize,  etc."  to  indicate  that  if  an  individual  engaged 
in  trade  between  the  States,  etc.,  by  his  own  skill  and  energy, 
and  by  the  propriety  of  his  conduct  generally,  shall  pursue  his 
calling  in  such  a  way  as  to  monopolize  a  trade,  his  action  would 
be  a  crime  under  the  proposed  act. 

"  Suppose,"  he  said,  "  a  citizen  of  Kentucky  is  dealing  in  short-horn 
cattle  and  by  virtue  of  his  superior  skill  in  that  particular  product  it 

1  214  Fed.  987,  1000;  1914.  2  223  Fed.  55;  1915. 

3  173  Fed.  196;  1909. 


254  SHERMAN   ANTI-TRUST   LAW 

turns  out  that  he  is  the  only  one  in  the  United  States  for  whom  an 
order  comes  from  Mexico  for  cattle  of  that  stock  for  a  considerable 
period,  so  that  he  is  conceded  to  have  a  monopoly  of  that  trade  with 
Mexico;  is  it  intended  by  the  Committee  that  the  bill  shall  make 
that  man  a  culprit  ?  " 

Senator  Hoar  replied  that  it  was  neither  intended,  nor  did 
the  bill  do  it,  and  Senator  Edmunds  concurred  in  that  opinion, 
while  Senator  Hoar  added  that  the  word  "monopoly"  was  a 
technical  term  known  to  the  common  law  which  had  a  clear 
and  legal  signification,  and  it  is  this :  "  It  is  the  sole  engross- 
ing to  a  man's  self  by  means  which  prevent  other  men  from 
engaging  in  fair  competition  with  him." 

In  the  Standard  Oil  Case,  the  Chief  Justice  held  that  the 
meaning  of  the  words  as  employed  in  the  statute  was  made 
clear  by  recourse  to  the  previous  history  of  the  law  of  restraint 
of  trade  and  the  indication  which  it  gave  of  the  practical  evolu- 
tion by  which  monopoly  and  the  acts  that  produced  the  same 
result  as  monopoly,  that  is,  an  undue  restraint  of  the  course  of 
trade,  all  came  to  be  spoken  of  as,  and  indeed  to  be  synony- 
mous with,  restraint  of  trade.  In  other  words,  he  said  : 

"Having  by  the  first  section  forbidden  all  means  of  monopolizing 
trade,  that  is,  unduly  restraining  it  by  means  of  every  contract,  com- 
bination, etc.,  the  second  section  seeks,  if  possible,  to  make  the  pro- 
hibitions of  the  act  all  the  more  complete  and  perfect  by  embracing 
all  attempts  to  reach  the  end  prohibited  by  the  first  section,  that  is, 
restraints  of  trade,  by  any  attempt  to  monopolize,  or  monopolization 
thereof,  even  although  the  acts  by  which  such  results  are  attempted 
to  be  brought  about  or  are  brought  about  be  not  embraced  within  the 
general  enumeration  of  the  first  section."  l 

In  the  Steel  Corporation  Case,  Judge  Buffington,  after  re- 
ferring to  the  definitions  of  the  act  established  by  the  preceding 
decisions  of  the  Supreme  Court,  said  that  the  basic  question 
for  the  court  there  to  decide  was  one  of  fact,  namely :  whether 
the  union  of  the  several  defendant  companies  in  the  United 

*221  U.  S.  61;  1911. 


SHERMAN   ANTI-TRUST   LAW  255 

States  Steel  Corporation  "prejudices  the  public  interest  by 
unduly  restricting  competition  or  unduly  obstructing  the 
course  of  trade." 

"The  public  interests  thus  prejudiced/'  he  said,  "consist  of  —  first, 
competitors  in  trade;  second,  the  purchasing  public;  and  third,  the 
general  public.  For  example,  if  this  Steel  Company  was  in  any  way 
guilty  of  unfair  business  competition,  if  it  was  guilty  of  such  conduct 
as  to  unfairly  force  a  competitor  out  of  the  steel  business,  or  if  it  un- 
fairly prevented  those  who  wanted  to  go  into  the  steel  business  from 
doing  so,  then  the  Steel  Company  was,  in  the  judgment  of  the  Supreme 
Court,  prejudicing  the  public  interests  by  unfairly  driving  individuals 
out  of  business  or  preventing  them  from  entering  it,  and  it  was  also 
injuring  the  public  by  unduly  restraining  trade.  So  also  if  this  Steel 
Company  was  restricting  output  in  order  to  exact  unfair  prices ;  if  it 
was  buying  up  competing  plants  and  dismantling  them  to  needlessly 
restrict  output ;  if  it  was  by  reason  of  its  controlling  power  furnishing 
the  public  with  inferior  goods ;  if  it  was  using  its  power  to  needlessly 
and  unfairly  reduce  wages;  if  it  was  seeking  to  deceive  purchasers 
by  a  false  appearance  of  competition,  when  in  fact  it  owned  or  con- 
trolled such  seeming  competition  —  then  it  was  prejudicing  not  only 
that  portion  of  the  public  which  desired  to  buy  steel,  but  the  public  in- 
terests generally  by  unduly  obstructing  the  course  of  trade  and  thereby 
preventing  the  steel  business  from  moving  in  its  natural  and  normal 
channel." 

Applying  these  principles,  Judge  Buffington  said  it  would 
appear  that  the  questions  of  fact  for  the  court  to  determine 
from  the  evidence  were,  viz. : 

"First.  Was  the  Steel  Corporation,  when  this  bill  was  filed  in 
1911,  prejudicing  the  public  interests  by  unduly  restricting  competi- 
tion, or  unduly  obstructing  the  course  of  the  steel  and  iron  trade, 
between  the  States,  or  with  foreign  nations?  If  this  question  be 
answered,  yes,  —  the  law  was  then  being  violated  and  an  injunction 
should  issue  to  restrain  present  and  future  violations. 

"Second.  Did  the  Steel  Corporation,  when  it  was  formed  in  1901, 
either  by  the  intent  of  those  forming  it,  or  by  the  inherent  nature  of 
that  Company's  contemplated  acts,  prejudice  the  public  interests  by 
unduly  restricting  competition  or  unduly  obstructing  the  course  of 
the  steel  and  iron  trade,  interstate  or  foreign?  If  this  question  be 


256  SHERMAN   ANTI-TRUST   LAW 

answered,  yes,  —  then  the  law  was  violated,  and  the  Steel  Corpora- 
tion must  be  adjudged  originally  illegal.  If  illegal,  it  must  be  dis- 
solved, because  only  thus  can  its  inherent  nature  be  prevented  from 
continuing  to  work  further  violations  of  the  statute.  On  the  other 
hand,  if  these  questions  are  negatived,  then  the  Steel  Corporation 
should  not  be  dissolved,  but  permitted  to  pursue  that  usual  course  of 
trade,  which  it  was  the  purpose,  as  we  have  seen,  of  this  statute  to 
protect." 

As  the  court  reached  the  conclusion  that  these  questions  should 
be  answered  in  the  negative,  the  relief  prayed  in  the  bill  was 
denied. 

One  unsettled  question  under  the  act  is  left  for  the  decision 
of  the  Supreme  Court ;  a  question  which  is  squarely  presented 
in  cases  now  awaiting  argument  in  that  court  against  the  Inter- 
national Harvester  Company  and  the  United  States  Steel  Cor- 
poration. That  question  is,  whether  in  a  case  where  a  com- 
bination has  been  formed  by  vesting  a  corporation  with  the 
control  through  stock  ownership  or  otherwise  of  a  number  of 
competing  corporations,  thereby  suppressing,  or  empowering 
the  holding  corporation  to  suppress  existing  competition,  and 
to  dominate  the  commerce  in  commodities  dealt  with,  but  the 
power  so  attained  has  not  been  unfairly  used,  competition  has 
not  been  destroyed,  and  in  fact  competitiors  have  increased  in 
number  and  in  the  amount  of  business  controlled  by  them, 
and  at  the  time  the  Government  sues  the  defendant  corpora- 
tion actually  controls  a  smaller  percentage  of  the  interstate 
commerce  conducted  by  it  than  it  did  when  formed,  the  original 
unlawful  purpose  must  be  attributed  to  the  existing  situation, 
and  the  combination  dissolved. 

In  the  Harvester  Case *  a  majority  of  the  Circuit  Judges  in 
the  Eighth  Circuit  answered  that  question  in  the  affirmative. 
(See  opinion  of  Smith,  J.,  at  p.  1000.)  Judge  Hook  thus 
summed  up  the  decision  of  the  court : 

"The  International  Harvester  Company  is  not  the  result  of  the 
normal  growth  of  the  fair  enterprise  of  an  individual,  a  partnership 
1  214  Fed.  987;  1914. 


SHERMAN   ANTI-TRUST   LAW  257 

or  a  corporation.  On  the  contrary,  it  was  created  by  combining  five 
great  competing  companies  which  controlled  more  than  80  per  cent 
of  the  trade  in  necessary  farm  implements,  and  it  still  maintains  a  sub- 
stantial dominance.  That  is  the  controlling  fact;  all  else  is  detail." 

In  the  Steel  Case,  two  of  the  judges  were  of  the  opinion  that 
no  matter  what  had  been  the  case  in  the  past,  the  combination 
would  not  be  dissolved  unless  the  evidence  showed  a  violation 
of  the  act  when  presented  to  the  court,  that  is  whether  in  that 
case,  "the  union  of  the  several  defendant  companies  in  the 
United  States  Steel  Corporation  'prejudices  the  public  in- 
terests by  unduly  restricting  competition  or  unduly  restraining 
the  course  of  trade/"  and  that,  "the  acts  of  the  combination 
are  fair  tests  of  the  real  inherent  nature  of  the  combination, 
and  that  in  such  a  case  the  time-tried  rule,  'By  their  fruits  ye 
shall  know  them/  might  well  serve  to  best  gauge  the  source  or 
tree  from  or  on  which  the  fruit  matured  "  (p.  116). 

Judges  Hunt  and  Woolley  reached  the  conclusion  that  as  a 
matter  of  fact  and  law  "the  organizers  of  the  corporation 

(1)  intended  to  create  a  monopoly  and  to  restrain  trade,  and 

(2)  combined  with  others  and  attempted  to  monopolize  trade, 
within   the   meaning   of   the   act,    and   that   the   corporation 
(1)  neither  attempted  nor  possessed  the  power  alone  to  do 
the  unlawful  things  intended  by  its  formation,  but  (2)  that  it 
unlawfully  combined  with  others  to  restrain  trade  by  control- 
ling prices."    That  whatever  remedy  there  might  be  against 
the  organizers  of  the  corporation  for  acts  violative  of  the 
statute,  "certainly  in  this  proceeding  in  equity  a  decree  of  dis- 
solution cannot  be  awarded  against  the  corporation  for  the 
unlawful  intent  and  the  unsuccessful  attempt  of  its  organizers 
to  violate  the  law.     Upon  the  finding  that  the  corporation  in 
and  of  itself  is  not  now  and  has  never  been  a  monopoly  or  a 
combination  in  restraint  of  trade,  a  decree  of  dissolution  should 
not  be  entered  against  it."     But  as  they  found  that  the  cor- 
poration had  violated  one  of  the  provisions  of  the  statute  by 
combining  with  others  to  unduly  restrain  trade,  and  possessed 


258  SHERMAN   ANTI-TRUST   LAW 

the  power  to  again  unlawfully  combine  with  others  to  do  the 
same  unlawful  acts,  although  not  at  the  moment  actively 
threatening  the  same,  yet  because  of  the  disposition  displayed 
throughout  a  large  portion  of  its  history,  it  might  again  do  so, 
these  two  judges  were  of  opinion  that  the  corporation  should 
be  prevented  from  doing  the  things  and  repeating  the  prac- 
tices respecting  the  fixing  and  maintaining  of  prices  which 
they  viewed  as  illegal. 

As  we  have  seen,  the  Anti-trust  Law  is  entitled,  "An  act 
to  protect  trade  and  commerce  against  unlawful  restraints 
and  monopolies,"  and  by  the  third  section,  the  several  Circuit 
Courts  of  the  United  States  are  invested  with  jurisdiction  "to 
prevent  and  restrain  violations  of  this  act."  The  power  given 
in  this  brief  and  comprehensive  language  has  been  held  to 
justify  the  application  of  remedies  twofold  in  character,  viz. : 
first,  to  forbid  the  doing  in  the  future  of  acts  such  as  those 
which  the  court  finds  to  have  been  done  in  the  past,  which  would 
be  violative  of  the  statute;  and  second,  the  exertion  of  such 
measure  of  relief  as  will  effectually  dissolve  the  combination 
found  to  exist  in  violation  of  the  statute.1 

In  ordinary  cases  of  combinations,  such  as  that  presented  in 
the  Addyston  Pipe  &  Iron  Company  Case,  an  injunction  against 
the  continuance  of  the  combination  is  effective  to  secure  the 
relief  sought.  In  the  Northern  Securities  Case,  the  decree  of 
the  Circuit  Court,  following  the  prayer  of  the  bill,  enjoined  the 
Securities  Company  from  voting  the  stocks  in  the  Railway 
Companies  held  by  it,  or  from  collecting  dividends  on  them, 
but  provided  that  nothing  in  the  decree  should  be  construed  to 
prohibit  the  Securities  Company  from  returning  the  stocks  of 
the  respective  Railway  Companies  to  the  holders  and  owners 
of  its  own  stock  originally  issued  in  exchange  or  payment  for 
the  stocks  of  the  Railway  Companies.  After  the  affirmance  of 
the  decree  by  the  Supreme  Court,  the  Securities  Company, 

1  Standard  Oil  Co.  v.  United  States,  221  U.  S.  78;  1911.  United  States  v. 
Union  Pacific  Railroad  Company,  226  U.  S.  96 ;  1912. 


SHERMAN  ANTI-TRUST   LAW  259 

instead  of  attempting  to  return  the  stocks  of  the  Railway 
Companies  held  by  it  to  the  individuals  from  whom  it  had 
received  them  in  exchange  for  its  own  stock,  reduced  its  capi- 
tal from  $400,000,000  to  a  trifle  under  $4,000,000,  and  directed 
the  distribution  of  the  stocks  of  the  Railway  Companies  held 
by  it  pro  rata  among  all  of  its  stockholders.  Mr.  Harriman 
and  the  Union  Pacific  Railroad  Company  objected  to  this  dis- 
tribution, contending  that  they  should  get  back  what  they 
had  put  in,  and  brought  suit  to  compel  the  Securities  Company 
to  make  this  return;  but  the  courts  denied  them  that  relief, 
holding  that  the  pro  rata  distribution  was  proper.  In  the 
opinion  of  the  Supreme  Court,  the  Chief  Justice  said,  referring 
to  the  suit  by  the  United  States  against  the  Northern  Securi- 
ties Company : 

"Some  of  our  number  thought  that  as  the  Securities  Company 
owned  the  stock,  the  relief  sought  could  not  be  granted,  but  the  con- 
clusion was  that  the  possession  of  power,  which,  if  exercised,  would 
prevent  competition,  brought  the  case  within  the  statute,  no  matter 
what  the  tenure  of  title  was." 

After  reviewing  the  whole  situation,  he  concluded  in  this 
language : 

"Doubtless  it  became  the  duty  of  the  Securities  Company  to  end 
a  situation  that  had  been  adjudged  unlawful,  and  this  could  be  effected 
by  sale  and  distribution  in  cash,  or  by  distribution  in  kind,  and  the 
latter  method  was  adopted,  and  wisely  adopted,  as  we  think,  for  the 
forced  sale  of  several  hundred  millions  of  stock  would  have  manifestly 
involved  disastrous  results.  In  fine,  the  title  to  these  stocks  having 
intentionally  been  passed,  the  former  owners  or  part  of  them  cannot 
reclaim  the  specific  shares  and  must  be  content  with  their  ratable  pro- 
portion of  the  corporate  assets."  l 

Throughout  the  discussion  in  all  the  courts,  it  appeared  to 
be  recognized  that  no  principle  of  law  could  prevent  the  same 
group  of  individuals  from  acquiring  and  owning  stocks  in  com- 
peting corporations  in  the  same  proportions,  but  that  the  law 

1197U.  S.  244,  298;  1905. 


260  SHERMAN   ANTI-TRUST   LAW 

did  condemn  the  acquisition  of  a  perpetual  control  of  compet- 
ing corporations  by  vesting  their  stocks  in  corporate  hands, 
thereby  preventing  the  ultimate  distribution  of  ownership 
which  always  results  from  individual  stockholding.  In  1895, 
when  an  effort  was  made  on  behalf  of  the  Great  Northern  Rail- 
road Company  to  secure  control  of  the  Northern  Pacific  Rail- 
way by  putting  the  stock  of  the  latter  in  the  hands  of  a  trustee 
for  the  benefit  of  the  stockholders  of  the  Great  Northern,  the 
Supreme  Court  had,  while  condemning  that  agreement,  ex- 
pressly recognized  that  individual  stockholders  could  lawfully 
acquire  by  purchase  a  majority  or  even  the  whole  of  the  stock 
of  another  and  competing  company,  but  it  was  pointed  out  that 
in  such  case  the  companies  would  still  remain  separate  corpora- 
tions, with  no  interests  as  such  in  common,  and  that  within  a 
short  time  by  sales  of  the  stock  so  acquired,  the  control  of  those 
corporations  might,  and  in  all  probability  would,  become  fully 
dissevered.  In  the  Northern  Securities  Case,  Justice  Holmes, 
in  his  dissenting  opinion,  said : 

"I  do  not  expect  to  hear  it  maintained  that  Mr.  Morgan  could  be 
sent  to  prison  for  buying  as  many  shares  as  he  liked  of  the  Great 
Northern  and  the  Northern  Pacific,  even  if  he  bought  them  both  at 
the  same  time  and  got  more  than  half  the  stock  of  each  road."  l 

The  decree  entered  by  the  Circuit  Court  in  the  Standard 
Oil  Case  enjoined  the  Standard  Oil  Company  from  voting  the 
stocks  of  its  twenty  odd  subsidiary  corporations,  from  collect- 
ing dividends  upon  them,  or  through  the  ownership  of  those 
stocks  from  exercising  any  control  over  such  subsidiary  cor- 
porations; but  it  specifically  provided,  that  "the  defendants 
are  not  prohibited  by  this  decree  from  distributing  ratably  to 
the  shareholders  of  the  principal  Company  the  shares  to  which 
they  are  equitably  entitled  in  the  stocks  of  the  defendant  cor- 
porations that  are  parties  to  the  combination."  This  decree 
was  affirmed  by  the  Supreme  Court,  with  a  slight  modification, 

U93  U.  S.  409;  1904. 


SHEKMAN   ANTI-TRUST   LAW  261 

thus  in  effect  approving  this  method  of  dissolving  the  unlawful 
combination ;  the  court  taking  pains  to  say  that  in  applying 
remedies  "the  fact  must  not  be  overlooked  that  injury  to 
the  public  by  the  prevention  of  an  undue  restraint  on  or  the 
monopolization  of  trade  or  commerce,  is  the  foundation  upon 
which  the  prohibitions  of  the  statute  rest,  and  moreover,  that 
one  of  the  fundamental  purposes  of  the  statute  is  to  protect, 
not  to  destroy,  rights  of  property."  1  But  in  the  case  of  the 
unlawful  combination  found  to  have  been  created  by  the  ac- 
quisition by  the  Union  Pacific  Railroad  Company  of  a  control- 
ling interest  in  the  stock  of  the  Southern  Pacific  Company,  the 
Supreme  Court  took  occasion  to  say  that  in  order  to  conclude 
the  operating  force  of  the  combination,  a  disposition  should  be 
made  of  the  shares  of  stock  acquired  by  the  Union  Pacific 
Company,  subject  to  the  approval  and  decree  of  the  District 
Court,  and  that  any  plan  for  the  disposition  of  that  stock  must 
be  such  as  to  effectually  dissolve  the  unlawful  combination 
thus  created.  It  directed  the  District  Court  to  proceed,  upon 
the  presentation  of  any  plan,  to  hear  the  government  and  the 
defendants,  and  to  bring  in  any  additional  parties  whose  presence 
might  be  necessary  to  the  final  disposition  of  the  stock  in  con- 
formity to  the  views  expressed  in  the  opinion  of  the  court.1 

For  the  purpose  of  more  clearly  elucidating  the  meaning  of 
this  provision  in  the  opinion  of  the  court,  an  application  was 
made  to  the  court  by  both  the  Attorney-General  and  the  repre- 
sentatives of  the  defendant  Company  for  further  instructions, 
by  provision,  to  be  incorporated  in  the  mandate,  or  otherwise, 
as  to  whether  or  not  a  sale  of  the  Southern  Pacific  stock  to 
and  among  the  stockholders  of  the  Union  Pacific  substantially 
in  proportion  to  their  respective  holdings,  or  the  distribution 
thereof  by  dividends  to  Union  Pacific  stockholders  entitled  to 
such  dividends,  would,  in  the  opinion  of  the  court,  constitute 
a  disposition  of  such  shares  in  compliance  with  its  previous 
opinion.  The  court  entertained  the  motion,  and  held  that  such 

'226U.  S.  61,  97;  1912. 


262  SHERMAN   ANTI-TRUST   LAW 

a  distribution  would  not  so  effectually  end  the  combination  as 
to  comply  with  its  decision;  that  the  main  purpose  of  the 
Anti-trust  Law  was  to  prevent  combinations  and  conspiracies 
in  undue  restraint  of  trade,  or  intending  to  monopolize  it,  and 
that  the  object  of  proceedings  of  this  character  was  to  decree 
by  as  effectual  means  as  a  court  may,  the  end  of  such  unlawful 
combinations  and  conspiracies. 

"So  far  as  is  consistent  with  this  purpose,"  they  said,  "a  court  of 
equity  dealing  with  such  combinations  should  conserve  the  property 
interests  involved,  but  never  in  such  wise  as  to  sacrifice  the  object 
and  purpose  of  the  statute.  The  decree  of  the  courts  must  be  faith- 
fully executed  and  no  form  of  dissolution  be  permitted  that  in  sub- 
stance or  effect  amounts  to  restoring  the  combination  which  it  was  the 
purpose  of  the  decree  to  terminate."  l 

In  the  American  Tobacco  Company  Case  the  Supreme  Court 
said: 

"Our  conclusion  being  that  the  combination  as  a  whole,  involving 
all  its  cooperating  or  associated  parts,  in  whatever  form  clothed,  con- 
stitutes a  restraint  of  trade  within  the  first  section,  and  an  attempt 
to  monopolize  or  a  monopolization  within  the  second  section  of  the 
antitrust  act,  it  follows  that  the  relief  which  we  are  to  afford  must  be 
wider  than  that  awarded  by  the  lower  court;  .  .  .  but  in  order  to 
enable  us  to  award  relief  coterminous  with  the  ultimate  redress  of  the 
wrongs  which  we  find  to  exist,  we  must  approach  the  subject  of  relief 
from  an  original  point  of  view." 

The  court  then  pointed  out,  that  a  mere  decree  forbidding 
stock  ownership  by  one  part  of  the  combination  in  another 
part,  or  an  entity  thereof,  would  afford  no  adequate  measure 
of  relief,  since  different  ingredients  of  the  combination  would 
remain  unaffected,  and  by  the  very  nature  and  character  of 
their  organization  would  be  able  to  continue  the  wrongful 
situation  which  it  was  their  duty  to  destroy.  Considering  all 
of  the  questions  involved  and  the  difficulties  which  presented 
themselves,  in  view  of  the  extent  of  the  combination,  the  vast 

1226U.  S.  470,  477;  1913. 


SHERMAN   ANTI-TRUST   LAW  263 

field  which  it  covered,  the  all-embracing  character  of  its  activi- 
ties concerning  tobacco  and  its  products,  to  at  once  enjoin  the 
movement  in  interstate  commerce  of  the  products  which 
the  combination  or  its  operating  forces  produced  or  controlled, 
might  effect  infinite  injury  on  the  public  by  the  stoppage 
of  immediate  supply  and  the  great  enhancement  of  prices; 
and  to  at  once  resort  to  a  receivership  might  not  only  do 
grievous  injury  to  the  public,  but  cause  widespread  and  per- 
haps irreparable  loss  to  many  innocent  people.  Under  all  these 
circumstances,  the  court  decreed  that  the  combination  in  and 
of  itself,  and  as  to  all  of  its  elements,  was  unlawful  under  the 
first  and  second  sections  of  the  Antitrust  Act;  that  the  Dis- 
trict Court  should  hear  the  parties  for  the  purpose  of  ascer- 
taining and  determining  upon  some  plan  or  method  of  dissolv- 
ing the  combination  and  of  re-creating  out  of  the  elements 
then  composing  it  a  new  condition  which  would  be  honestly 
in  harmony  with  and  not  repugnant  to  the  law,  and  that  for 
this  purpose  a  period  of  six  months  was  allowed  from  the  receipt 
of  the  mandate  of  the  Supreme  Court,  with  the  right  to  an 
extension  of  not  to  exceed  sixty  days;  and  that  if  before  the 
expiration  of  that  period  "a  condition  of  disintegration  in  har- 
mony with  the  law  is  not  brought  about,  either  as  the  conse- 
quence of  the  action  of  the  court  in  determining  an  issue  on 
the  subject,  or  in  accepting  a  plan  agreed  upon,  it  shall  be  the 
duty  of  the  court,  either  by  way  of  an  injunction  restraining 
the  movement  of  the  products  of  the  combination  in  the  chan- 
nels of  interstate  or  foreign  commerce,  or  by  the  appointment 
of  a  receiver,  to  give  effect  to  the  requirements  of  the  statute."  1 
It  is  safe  to  say  that  no  task  ever  has  been  imposed  upon  the 
law  officers  of  the  government  and  the  judges  of  a  court  com- 
parable in  magnitude  and  complexity  to  that  which  was  thus 
devolved  upon  the  Department  of  Justice  and  the  Judges  of 
the  Second  Circuit  by  this  decree  of  the  Supreme  Court.  The 
combination  which  the  Supreme  Court  adjudged  "as  a  whole, 

'221  U.  S.  187,  188;  1911. 


264  SHERMAN   ANTI-TRUST   LAW 

involving  all  its  cooperating  or  associated  parts,  in  whatever 
form  clothed,"  to  constitute  a  restraint  of  trade  within  the 
first  section,  and  an  attempt  to  monopolize  or  a  monopolization 
within  the  second  section  of  the  Anti-trust  Act,  was  composed 
of  sixty-five  separate  corporations  of  different  States  and 
twenty-nine  individuals.  The  American  Tobacco  Company 
which,  by  the  direct  or  indirect  ownership  of  properties  and 
stocks  of  other  corporations,  exercised  effective  control  of  the 
combination,  had  outstanding  issues  of  $78,000,000  of  preferred 
stock,  without  voting  power,  distributed  to  the  public,  and 
$40,000,000  of  common  stock,  with  voting  power,  the  majority 
of  which  was  controlled  by  the  twenty-nine  individual  defend- 
ants, and  it  also  had  outstanding  in  the  hands  of  the  public 
two  issues  of  bonds,  aggregating  upwards  of  $104,000,000. 
The  combined  assets  of  the  combination  at  the  date  of  the 
filing  of  the  bill  in  1907,  amounted  to  more  than  $400,000,000, 
and  the  combined  income  of  the  companies  for  that  year  exceeded 
$36,000,000.  Excluding  cigars,  the  American  Tobacco  Com- 
pany and  its  subsidiaries  manufactured  and  distributed  more 
than  75  per  cent  of  all  tobacco  products  of  the  United  States, 
and  they  were  engaged  in  business  and  owned  property  in 
almost  every  State  of  the  Union  and  in  many  foreign  coun- 
tries. The  Supreme  Court  had  laid  down  as  principles  which 
must  guide  the  action  of  the  court  in  terminating  the  existing 
wrongful  situation : 

"1.  The  duty  of  giving  complete  and  efficacious  effect  to  the  pro- 
hibitions of  the  statute;  2,  the  accomplishing  of  this  result  with  as 
little  injury  as  possible  to  the  interest  of  the  general  public;  and 
3,  a  proper  regard  for  the  vast  interests  of  private  property  which 
may  have  become  vested  in  many  persons  as  a  result  of  the  acquisi- 
tion either  by  way  of  stock  ownership,  or  otherwise,  of  interests  in  the 
stock  or  securities  of  the  combination,  without  any  guilty  knowledge 
or  intent  in  any  way  to  become  actors  or  participants  in  the  wrongs 
which  we  find  to  have  inspired  and  dominated  the  combination  from 
the  beginning."  l 

*221  U.  S.  185;  1911. 


SHERMAN   ANTI-TRUST   LAW  265 

There  were  no  precedents  to  furnish  any  guide  in  working 
out  the  required  plan  of  disintegration.  No  machinery  had 
been  provided  by  Congress  to  aid  either  the  court  or  the  De- 
partment of  Justice  in  discharging  the  task.  That  it  was 
accomplished,  that  a  combination  of  such  magnitude  and 
complexity  was  disintegrated  without  the  loss  of  a  dollar  to 
public  or  private  interests,  save  the  curtailment  for  the  future 
of  the  monopolistic  profits  which  theretofore  had  resulted  from 
the  combination ;  that  bond  issues  of  upwards  of  $100,000,000 
were  paid  off  without  the  loss  of  a  dollar ;  that  the  holders  of 
seventy-eight  million  dollars  in  preferred  stock  received  its 
equivalent  value  in  new  securities,  and  that  the  business,  which 
was  largely  one  of  brands,  was  distributed  among  fourteen 
separate  distinct  and  competing  corporations,  and  that  the 
will  of  the  Supreme  Court  was  adequately  carried  out  and  its 
caution  specifically  followed,  —  will  ever  remain,  to  those  who 
were  responsible  for  the  result,  a  source  of  abiding  gratification. 

The  voting  power  which  had  controlled  this  vast  corporation 
by  being  lodged  in  the  hands  of  the  holders  of  a  majority  of  the 
$40,000,000  of  common  stock,  was  distributed  among  the 
holders  of  all  the  new  stocks,  including  not  only  that  amount 
of  common  stock,  but  also  the  $78,000,000  of  preferred  stocks. 
The  business  of  the  combination  was  divided  up  among  four- 
teen separate  and  distinct  corporations  in  such  manner  that 
no  one  was  given  an  amount  of  the  business  in  any  particular 
line  in  excess  of  40  per  cent  of  the  business  of  the  country  in 
that  line,  and  save  in  one  or  two  instances,  not  in  excess  of 
one  third  of  such  business.  The  various  brands  were  so  dis- 
tributed among  the  respective  companies  that  no  one  com- 
pany had  the  advantage  in  brands  over  another.  No  com- 
pany was  given  a  dominant  position  in  the  purchase  of  any 
particular  type  of  leaf  tobacco  from  another.  The  licorice 
business,  the  tin  foil  business  and  the  snuff  business  were  sepa- 
rated from  the  tobacco  business,  and  transferred  to  separate 
corporations,  and  the  companies  engaged  in  foreign  business 


266  SHERMAN   ANTI-TRUST   LAW 

were  divorced  entirely  from  the  domestic  companies.  This 
plan  of  distribution  was  submitted  to  and  approved  as  eco- 
nomically sound  by  experts  of  the  Bureau  of  Corporations  of 
the  Department  of  Commerce  and  Labor,  who  had,  through  a 
study  of  years,  become  thoroughly  familiar  with  the  tobacco 
industry.  All  restrictive  covenants,  foreign  and  domestic, 
were  terminated.  The  twenty-nine  individual  defendants, 
who  had  controlled  the  combination  in  the  past,  were  enjoined 
from  increasing  their  holdings  in  any  of  the  new  companies.  The 
fourteen  new  companies  were  specifically  enjoined  from  convey- 
ing property  from  one  to  the  other,  from  acquiring  stock  in  one 
another  and  from  lending  financial  assistance  to  each  other. 
They  were  enjoined  from  making  agreements  with  each  other 
as  to  prices,  terms  of  purchase  or  sale  of  leaf  tobacco  or  other 
products  dealt  in  by  them,  or  apportioning  business  among 
themselves  with  respect  to  localities.  Every  company  was 
enjoined  from  employing  the  same  business  organization  as  that 
of  another  company,  from  having  the  same  purchasing  or  sell- 
ing agents,  and  from  occupying  the  same  offices.  They  were 
enjoined  from  having  common  directors  or  common  officers. 
Every  distributee  company  was  enjoined  from  doing  business 
except  in  its  own  name  or  in  that  of  a  subsidiary  company, 
and  where  business  was  done  in  the  name  of  a  subsidiary,  it  was 
provided  that  the  product  should  bear  the  name  of  the  con- 
trolling company.  They  were  enjoined  from  selling  any  brand 
or  product  on  condition  that  the  purchaser  should  also  buy 
from  the  vendor  some  other  brand  manufactured  or  sold 
by  it. 

This  plan,  as  the  Circuit  Court,  speaking  by  Judge  Noyes, 
said: 

"has  been  built  up  almost  in  our  presence,  and  whatever  question 
there  may  be  as  to  its  merits  there  is  none  of  the  good  faith  of  its 
authors,  nor  of  the  ability  and  conscientiousness  with  which  they 
have  performed  their  task/' 1 

1  191  Fed.  386;  1911. 


SHERMAN   ANTI-TRUST   LAW  267 

It  was  unanimously  approved  by  the  four  Circuit  Judges, 
every  one  of  whom  wrote  an  opinion.  It  was  at  once  made  the 
object  of  bitter  partisan  attack  on  the  part  of  those  who  de- 
sired to  see  all  business  reduced  to  small  retail  units  on  the 
one  hand,  on  the  part  of  political  partisan  opponents  to  the 
national  administration  then  in  power  on  the  other  hand,  and 
also  on  the  part  of  theorists  with  no  sense  of  responsibility  for 
the  vast  interests  at  stake,  and  who  entertained  a  totally  mis- 
taken idea  of  the  nature  and  purpose  of  the  law  which  com- 
pelled the  dissolution. 

On  the  hearing  before  the  Circuit  Court,  the  Attorney- 
General  urged  that  the  decree  should  reserve  to  the  government 
the  right  at  any  time  within  five  years  from  the  date  of  its  entry 
to  apply  to  the  court  for  other  and  further  relief,  upon  a  show- 
ing that,  as  a  matter  of  fact,  such  plan  had  not  resulted  in 
creating  a  new  condition  which  should  be  honestly  in  harmony 
with  and  not  repugnant  to  the  law.  He  pointed  out  to  the 
court  that  it  was  obvious  that  any  plan  submitted  to  the 
consideration  of  the  court  must  be  more  or  less  a  matter  of  con- 
jecture, and  that  it  was  impossible  for  the  court  to  determine 
in  advance  whether  or  not  a  plan  which  proposed  to  restore 
competitive  conditions  would  actually  accomplish  the  purpose 
intended.  The  Circuit  Court  declined  to  accede  to  this  sug- 
gestion, upon  the  ground  that  it  was  beyond  its  power.  Neither 
in  the  mandate  of  the  Supreme  Court,  said  Judge  Lacombe, 

"nor  in  its  opinion,  is  there  any  warrant  for  the  conclusion  that  this 
court  is  to  prescribe  the  temporary  terms  of  a  modus  vivendi,  with 
power  to  reassemble  five  years  hence,  ourselves  or  our  survivors  and  suc- 
cessors, and  modify  those  terms,  while  in  the  interim  by  purchase  or 
exchange  of  these  bonds,  upwards  of  $100,000,000  worth  of  property 
shall  have  changed  hands  irrevocably.  The  only  function  assigned 
to  us  is  to  consider  any  proposed  plan  which  responsible  parties  engage 
to  carry  out,  and  approve  or  reject  it.  In  the  event  of  rejection  the 
only  alternative  is  injunction,  receivership  and  sale.  The  time  limit 
fixed  in  the  mandate  —  six  months,  and  possibly  two  more  —  pre- 
cludes any  other  construction  of  its  terms." 


268  SHERMAN  ANTI-TRUST   LAW 

A  different  view  has  been  since  taken  by  other  courts.  Thus 
in  the  Keystone  Watch  Company  Case,  the  Circuit  Judges  in 
the  Third  Circuit,  while  directing  that  an  injunction  should 
issue  to  restrain  the  corporation  defendant  from  repeating  the 
performance  of  the  acts  theretofore  done  by  it  which  were  held 
to  be  in  violation  of  the  Anti-trust  Law,  declined  to  break  up 
the  existing  corporate  entity,  on  the  ground  that  they  saw  no 
sufficient  evidence  that  the  public  interests  required  such 
action ;  but  they  added : 

"In  case  conditions  in  the  future  should  make  it  desirable  for  the 
government  to  ask  for  additional  relief,  even  to  the  point  of  breaking 
up  the  defendant  corporation,  we  shall  retain  jurisdiction  of  the  bill 
with  leave  to  the  government  to  take  such  action  hereafter  as  may 
seem  appropriate."  l 

In  the  United  States  Steel  Corporation  Case,  the  court  held 
that  the  government  had  not  made  out  a  case  that  should  be 
followed  by  a  decree  of  dissolution,  but  some  of  the  judges 
being  of  opinion  that  the  corporation  should  be  prevented  from 
doing  certain  things  and  repeating  certain  practices  respecting 
the  fixing  and  maintaining  of  prices  which  were  regarded  as 
illegal,  the  court  decided  that  if  desired  by  the  government,  it 
would  retain  jurisdiction  of  the  bill  for  the  purpose  of  allowing 
future  application  to  be  made  to  restrain  the  doing  of  such 
illegal  acts  in  case  they  should  be  repeated  in  the  future.  And 
in  the  suit  against  the  American  Can  Company,  recently  de- 
cided by  Judge  Rose  at  Baltimore,  similar  action  is  reported  to 
have  been  taken. 

Shortly  after  the  decree  of  dissolution  in  the  Tobacco  Casef 
the  so-called  Powder  Trust  was  dissolved  by  decree  of  the  Cir- 
cuit Court  in  Philadelphia.  By  that  decree  entered  June  13, 
1912,  a  large  number  of  subsidiary  corporations  belonging  to 
the  illegal  combination  were  ordered  to  be  dissolved  and  their 
properties  to  be  distributed  among  the  stockholders.  The 

1  218  Fed.  502,  519;  1915. 


SHERMAN   ANTI-TRUST   LAW  269 

main  businesses  of  the  manufacture  of  dynamite,  black  blasting 
powder,  black  sporting  powder  and  smokeless  powder,  were 
ordered  distributed  between  three  companies,  two  of  them 
newly  incorporated  for  the  purpose.  The  value  of  the  property 
transferred  by  the  parent  company  to  the  two  new  companies 
was  under  the  decree  to  be  represented  by  50  per  cent  in  bonds 
and  50  per  cent  in  stock,  and  the  court  decreed  that  one  half 
of  the  stocks  which  should  be  distributed  to  the  individual 
defendants  who  had  brought  about  and  controlled  the  combina- 
tion, should  be  without  voting  power  and  should  have  no  vot- 
ing power  so  long  as  such  stock  was  held  by  any  one  of  such 
defendants  or  their  respective  wives  or  children.  The  decree 
further  enjoined  the  distributee  companies  from  conveying 
property  one  to  the  other,  from  making  agreements  between 
each  other,  or  having  common  officers,  directors  or  clerical 
forces,  and  from  acquiring  stock  in  one  another. 

In  passing  upon  an  application  for  the  construction  of  its 
mandate  in  the  Union  Pacific  Case,  the  Supreme  Court  said : 

"As  was  said  in  the  opinion  filed  in  this  case,  however,  each  case 
under  the  Sherman  Act  must  stand  upon  its  own  facts,  and  we  are 
unable  to  regard  the  decrees  in  the  Northern  Securities  Company  case 
and  the  Standard  Oil  Company  case  as  precedents  to  be  followed  now 
in  view  of  the  different  situation  presented  for  consideration."  l 

And  in  finally  determining  a  very  vexed  question  as  to  the 
form  of  the  decree  to  be  entered  against  the  Great  Lakes  Tow- 
ing Company,  which  the  District  Court  in  the  Northern  Dis- 
trict of  Ohio  had  adjudged  to  constitute  an  unlawful  combina- 
tion,2 that  court,  composed  of  the  three  Circuit  Judges,  reviewed 
the  history  of  the  relief  which  had  been  granted  in  different 
cases  for  the  purpose  of  preventing  and  restraining  continued 
violations  of  the  Sherman  Act,  as  follows : 

"In  the  Northern  Securities  Case,  193  U.  S.  197 ;  1904,  dissolution  was 
accomplished  by  requiring  such  Securities  Company  to  largely  reduce 

*  226  U.  S.  474;  1913.  2  208  Fed.  733;  1913. 


270  SHERMAN   ANTI-TRUST   LAW 

its  own  stock  and  in  lieu  of  the  stock  so  retired  to  distribute  to  its 
own  stockholders  a  proportionate  amount  of  the  competitive  stocks 
held  by  it.  In  the  Standard  Oil  Case,  221  U.  S.  1 ;  191 1,  the  New  Jersey 
corporation  which  held  the  stocks  of  a  large  number  of  other  corpora- 
tions in  exchange  for  its  own,  was  required  to  distribute  the  stock  so 
held  among  its  own  stockholders.  In  the  Tobacco  Case,  221  U.  S. 
106 ;  1911,  the  business  was  divided  between  four  corporations ;  the  con- 
trolling companies  being  again  so  subdivided  that  business  control 
was  in  the  hands  of  a  large  number  of  separate  corporations.  Certain 
stock  distributions  were  made  and  injunctive  relief  given.  In  the 
Union  Pacific  Case,  226  U.  S.  470 ;  1913,  dissolution  was  affected  by  the 
sale  of  the  Southern  Pacific  stock.  In  the  Reading  Case,  the  unlawful 
combination  was  held  to  exist  as  to  the  Temple  Iron  Company  and  the 
65  per  cent  contracts,  and  defendants  were  enjoinedfrom  voting  the  stock 
of  the  Iron  Company,  the  contracts  referred  to  were  cancelled,  and  their 
further  execution  enjoined.  In  the  St.  Louis  Terminal  Case,  224  U.  S. 
383 ;  1912,  the  unlawful  condition  was  relieved  against  by  such  revamp- 
ing of  conditions  as  that  all  the  railroad  companies  could  get  the  benefit 
of  the  terminal  facilities  on  equal  terms.  It  is  thus  seen  that  even 
where  the  remedy  by  injunction  is  thought  to  be  inadequate,  there  is 
no  uniform  rule  respecting  the  means  to  be  employed  in  putting  an 
end  to  the  unlawful  combination.  Each  case  must  stand  upon  its 
own  facts;  and  methods  adopted  in  other  cases  are  not  necessarily 
to  be  followed  as  precedents,  except  where  the  same  situation  is  pre- 
sented. Union  Pacific  Case,  226  U.  S.  470;  1913."1 

In  most  instances,  the  result  is  accomplished,  as  was  done  in 
the  Tobacco  Case,  by  adjudging  the  defendants  to  be  in  unlaw- 
ful combination  and  providing  that  unless  a  plan  to  restore 
legality  be  adopted  and  approved  by  the  court  within  a  given 
time,  injunction  and  receivership  shall  go.  This,  of  course, 
requires  the  parties  to  devise  and  submit  to  the  law  officers  of 
the  government  and  to  the  court  a  plan  which  will  terminate 
the  existing  illegal  condition  and  afford  satisfactory  guarantees 
against  the  re-creation  in  the  future  of  the  unlawful  status. 

The  Federal  Trade  Commission  Act,2  recently  enacted,  con- 
tains the  following  provision,  which  is  substantially  what  was 
recommended  by  the  Attorney-General  to  Congress  in  his 

1  217  Fed.  659  ;  1914.  2  38  U.  S.  Stat.  at  Large  717. 


SHERMAN   ANTI-TRUST   LAW  271 

annual  report  for  1911  after  the  adoption  of  the  plan  of  dis- 
integration of  the  Tobacco  Trust : 

"Whenever  a  final  decree  has  been  entered  against  any  defendant 
corporation  in  any  suit  brought  by  the  United  States  to  prevent  and 
restrain  any  violation  of  the  antitrust  acts,  to  make  investigation, 
upon  its  own  initiative,  of  the  manner  in  which  the  decree  has  been 
or  is  being  carried  out,  and  upon  the  application  of  the  Attorney- 
General  it  shall  be  its  duty  to  make  such  investigation.  It  shall 
transmit  to  the  Attorney-General  a  report  embodying  its  findings  and 
recommendations  as  the  result  of  any  such  investigation,  and  the  re- 
port shall  be  made  public  in  the  discretion  of  the  commission.  .  .  . 

"Upon  the  application  of  the  Attorney-General  to  investigate  and 
make  recommendations  for  the  readjustment  of  the  business  of  any 
corporation  alleged  to  be  violating  the  antitrust  acts  in  order  that 
the  corporation  may  thereafter  maintain  its  organization,  management 
and  conduct  of  business  in  accordance  with  law. 

"That  in  any  suit  in  equity  brought  by  or  under  the  direction  of 
the  Attorney-General  as  provided  in  the  antitrust  acts,  the  court  may 
upon  the  conclusion  of  the  testimony  therein,  if  it  shall  be  then  of 
opinion  that  the  complainant  is  entitled  to  relief,  refer  said  suit  to 
the  commission  as  a  Master  in  Chancery  to  ascertain  and  report  an 
appropriate  form  of  decree  therein.  .  .  .  The  commission  shall  proceed 
upon  such  notice  to  the  parties  and  under  such  rules  of  procedure  as 
the  court  may  prescribe  and  upon  the  coming  in  of  such  report  such 
exceptions  may  be  filed  and  such  proceedings  had  in  relation  thereto 
as  upon  the  report  of  a  master  in  other  equity  cases,  but  the  court 
may  adopt  or  reject  such  report  in  whole  or  in  part  and  enter  such 
decree  as  the  nature  of  the  case  may  in  its  judgment  require/' l 

About  fifty-four  decrees  in  equity  dissolving  combinations, 
have  been  entered  in  the  various  Circuit  and  District  Courts 
of  the  United  States,  beginning  with  the  decree  entered  June  17, 
1891,  in  the  Circuit  Court  for  the  Middle  District  of  Tennessee 
against  the  Jellicoe  Mountain  Coal  &  Coke  Company,  down  to 
and  including  the  most  recent  decrees,  namely;  that  entered 
January  20,  1916,  in  the  District  Court  for  the  Western  Dis- 
trict of  New  York  against  the  Eastman  Kodak  Company  and 
others,  and  that  entered  in  the  District  Court  of  the  Eastern 


272  SHERMAN   ANTI-TRUST   LAW 

District  of  Pennsylvania  on  January  24,  1916,  against  the 
Motion  Picture  Patents  Company  and  others.  The  combina- 
tions dissolved  by  these  decrees  were  of  infinite  variety.  They 
included  traffic  associations  between  railroad  companies,  such 
as  those  described  in  the  Joint  Traffic  l  and  Traffic  Association 
Cases 2 ;  combinations  between  competing  manufacturers  for  the 
purpose  of  suppressing  competition,  such  as  that  before  the 
court  in  the  Addyston  Pipe  Case;  the  control  by  one  corpora- 
tion of  the  capital  stock  of  two  competing  transcontinental 
railway  systems  (Northern  Securities  Co.  v.  U.  $.3) ;  the  control 
by  one  corporation  of  the  capital  stock  of  another  competing 
railroad  (U.  S.  v.  Union  Pacific  4) ;  a  combination  controlling 
all  the  terminals  in  the  city  of  St.  Louis  (U.  S.  v.  Terminal 
Railway  Association 5) ;  combinations  of  wholesale  grocers ;  of 
manufacturers  of  incandescent  electric  lights;  of  dealers  in 
plumbing  supplies;  of  manufacturers  of  kindling  wood;  of 
retail  lumber  dealers,  —  having  for  their  purpose  the  suppres- 
sion of  competition  and  the  control  of  prices;  combinations 
of  owners  of  patents  extending  the  monopoly  secured  by  the 
Patent  Laws  beyond  the  scope  of  those  statutes;  pooling 
agreements  formed  for  the  control  of  the  price  of  cotton,  and 
various  other  contracts  and  combinations  which  on  the  evi- 
dence were  held  to  constitute  undue  restraints  upon  interstate 
or  foreign  commerce,  or  an  attempt  to  monopolize  the  same. 
In  all  of  these  cases,  the  decrees  dealt  comprehensively  with 
contracts,  organizations  or  practices  which  had  grown  up  or 
had  been  formed  between  two  substantial  competitors  in  a 
given  line,  for  the  purpose  of  excluding  competition  or  fixing 
prices,  and  by  various  conveyances,  transfers,  cancellations  and 
dissolutions  broke  them  up,  and  then,  by  injunctions  forbid- 
ding specified  acts,  made  provision  against  their  renewal  in  the 
future. 

It  only  remains  to  consider  the  criminal  provisions  of  the 

1  166  U.  S.  290;  1897.   2  171  U.  S.  505;  1898.    3  193  U.  S.  197;  1904. 
4  226  U.  S.  61 ;  1912.    B  224  U.  S.  383 ;  1912. 


SHERMAN   ANTI-TRUST   LAW  273 

statute.  All  of  the  acts  which  it  declares  unlawful  are  also 
made  misdemeanors,  punishable  by  fine  and  imprisonment. 
But  while  prosecutions  have  from  time  to  time  been  brought  to 
enforce  these  penalties,  juries  have  shown  great  reluctance  to 
convict  individual  defendants,  and  in  the  few  instances  where 
convictions  have  been  had,  the  penalty  of  imprisonment  has 
but  seldom  been  imposed,  and  in  every  instance,  but  one, 
where  imprisonment  has  been  imposed  by  the  court  upon  a 
defendant  the  judgment  has  been  reversed  on  appeal.  Such 
was  the  case  of  the  prosecution  of  the  members  of  the  so-called 
Turpentine  Trust  in  Savannah  (Nash  v.  U.  S.1)  and  the  con- 
viction of  the  officers  of  the  National  Cash  Register  Company 
in  Cincinnati,  Ohio  (Patterson  v.  U.  S.2).  In  the  sole  case 
where  the  appellate  court  affirmed  the  conviction  which  carried 
a  sentence  of  imprisonment,  namely,  that  of  the  so-called  Night 
Riders  in  Kentucky,  the  President  commuted  the  sentences 
and  remitted  the  penalty  of  imprisonment.  It  is  true  that  in 
a  large  number  of  instances,  fines  have  been  imposed  and  col- 
lected, and  the  liability  to  criminal  prosecution  undoubtedly 
has  served  as  a  deterrent,  particularly  in  recent  years,  against 
conscious  violation  of  the  law. 

The  decisions  thus  reviewed  have  demonstrated  the  Sher- 
man Anti-trust  Law  to  be  an  effective  instrument  for  the 
accomplishment  of  the  purposes  which  the  national  legislature 
had  in  view  upon  its  enactment.  It  may  seriously  be  doubted 
whether  the  so-called  Clayton  Law,  enacted  at  the  last  session 
of  Congress,  has  not,  in  its  effort  to  add  specific  prohibitions 
to  the  broad  general  denunciation  of  unlawful  restraint  on 
interstate  and  foreign  commerce  embodied  in  the  Sherman  Law, 
really  weakened  the  provisions  of  that  great  enactment.  It 
has  become  a  fashion  of  speech  in  some  quarters  to  speak  of  the 
Sherman  Law  as  having  been  a  failure.  That  the  policy  adopted 
by  Congress  of  seeking  to  prevent  the  arbitrary  and  far-reach- 
ing centralization  of  power  over  industry  which  was  making 

1  229  U.  S.  373  ;  1913.  *  222  Fed.  599 ;  1915. 

T 


274  SHERMAN   ANTI-TRUST   LAW 

startling  progress  at  the  time  of  its  enactment  was  demanded 
by  a  regard  for  the  national  health  and  welfare,  hardly  can  be 
questioned ;  that  the  Sherman  Law,  mistaken  as  was  the  original 
conception  of  its  provisions  by  some  of  the  courts,  halting  and 
imperfect  as  for  a  long  time  was  its  application,  in  the  light  of 
modern  interpretation  has  been  made  an  effective  means  of 
enforcing  the  rule  of  competition,  as  against  the  rule  of  combina- 
tion, can  admit  of  no  candid  doubt.  There  is,  of  course,  a  cer- 
tain borderland  of  uncertainty  in  its  application.  It  may 
frankly  be  conceded,  too,  that  in  many  instances  healthy  co- 
operation makes  for  the  public  welfare  more  than  destructive 
competition.  I  have  always  thought  that  a  different  rule 
should  be  applied  with  respect  to  foreign  trade  and  commerce 
than  as  regards  domestic  trade.  When  American  business 
seeks  expansion  in  foreign  countries,  it  meets  conditions  over 
which  it  has  no  control.  In  many  foreign  countries  the  rule 
of  competition  has  been  abolished  and  state  control  of  asso- 
ciated industry  has  been  substituted  for  it.  To  send  American 
merchants  into  fields  so  controlled,  prohibited  from  combining 
for  their  own  protection,  is  like  sending  ordinary  State  militia 
regiments  to  contend  with  the  trained  armies  of  France  or 
Germany.  But  that  the  consideration  which  moved  the 
statesmen  of  1890  to  frame  the  Sherman  Law  was  a  whole- 
some fear  of  the  effect  upon  Republican  institutions  of  the 
centralization  in  a  few  hands  of  control  over  American  indus- 
try, appears  to  me  to  be  beyond  dispute.  That  the  law  they 
enacted  has,  through  the  construction -finally  given  to  it  by  the 
Supreme  Court,  achieved  its  main  purpose  now  has  been 
irrefutably  demonstrated. 


THE  FEDERAL  TRADE  COMMISSION  AND  THE 
CLAYTON  ACT 

A  Lecture  Delivered  before  the  Association  of  the  Bar  of  the  City  of  New 
York,  by  Gilbert  H.  Montague,  March  22,  1916 

THE  Sixty-third  Congress  convened  for  its  Second  Session 
in  December,  1913,  with  antitrust  legislation  for  its  chief 
appointed  work.  The  Presidential  campaign  of  1912  had  been 
largely  waged  upon  the  issue  of  trusts ;  and  Mr.  Wilson  took 
pains  frequently  during  the  campaign  to  attack  the  Progressive 
party  for  tolerating,  under  its  proposals  of  regulation,  the  exist- 
ence and  development  of  business  units  and  combinations  so 
large  as  to  constitute  substantial  dominance  in  their  respective 
industries. 

A  Trade  Commission,  of  some  kind,  was  proposed  in  the 
platforms  of  the  Democratic,  the  Republican  and  the  Progres- 
sive parties.  But  the  Democratic  party,  influenced  apparently 
by  the  recommendation  of  the  Stanley  Committee  which  had 
investigated  the  United  States  Steel  Corporation,  proposed  also 
a  program  of  legislation,  supplementary  to  the  Sherman  Act, 
which  should  specify  and  enumerate,  in  definite  language,  cer- 
tain acts  as  ipso  facto  violations  of  the  antitrust  laws ;  and  the 
Republican  party,  influenced  apparently  by  the  report  of  Sena- 
tor Cummins  from  the  Senate  Committee  on  Interstate  Com- 
merce on  antitrust  legislation  in  1912,  and  by  the  proposals 
for  antitrust  legislation  that  had  been  introduced  and  agitated 
by  Congressman  Lenroot  and  Senator  La  Follette,  declared  even 
more  definitely  for  "the  enactment  of  legislation  supplemen- 
tary to  the  existing  antitrust  act,  which  will  define,  as  criminal 
offenses,  those  specific  acts  that  uniformly  mark  attempts  to 
restrain  and  monopolize  trade."  The  refusal  of  the  Progressive 
party  to  take  such  advanced  ground  in  this  direction,  and  the 

275 


276  THE   FEDERAL   TRADE   COMMISSION 

emphasis  placed  throughout  the  campaign  by  the  Progressive 
party  upon  the  ruthlessness  of  the  Sherman  Act  and  upon  the 
economies  of  big  business,  had  the  natural  consequence  of 
strengthening  the  adherence  of  the  Democratic  party,  and  par- 
ticularly its  Presidential  candidate,  to  these  proposals  for  sup- 
plementing and  strengthening  and  clarifying  the  Sherman  Act. 


This,  briefly,  was  the  background  for  the  Address  of  Presi- 
dent Wilson  to  Congress  on  January  20th,  1914,  in  which  he 
outlined  "  changes  which  opinion  deliberately  sanctions  and  for 
which  business  waits  "  : 

"It  waits,"  President  Wilson  continued,  "  with  acquiescence,  in  the 
first  place,  for  laws  which  will  effectually  prohibit  and  prevent  such 
interlockings  of  the  personnel  of  the  directorates  of  great  corpora- 
tions—  banks  and  railroads,  industrial,  commercial,  and  public 
service  bodies  —  as  in  effect  result  in  making  those  who  borrow  and 
those  who  lend  practically  one  and  the  same,  those  who  sell  and  those 
who  buy  but  the  same  persons  trading  with  one  another  under  different 
names  and  in  different  combinations,  and  those  who  affect  to  compete 
in  fact  partners  and  masters  of  some  whole  field  of  business.  .  .  . 

"The  business  of  the  country  awaits  also,  has  long  waited  and  has 
suffered  because  it  could  not  obtain,  further  and  more  explicit  legis- 
lative definition  of  the  policy  and  meaning  of  the  existing  antitrust 
law.  Nothing  hampers  business  like  uncertainty.  Nothing  daunts 
or  discourages  it  like  the  necessity  to  take  chances,  to  run  the  risk  of 
falling  under  the  condemnation  of  the  law  before  it  can  make  sure 
just  what  the  law  is.  Surely  we  are  sufficiently  familiar  with  the 
actual  processes  and  methods  of  monopoly  and  of  the  many  hurtful 
restraints  of  trade  to  make  definition  possible,  at  any  rate  up  to  the 
limits  of  what  experience  has  disclosed.  These  practices,  being  now 
abundantly  disclosed,  can  be  explicitly  and  item  by  item  forbidden 
by  statute  in  such  terms  as  will  practically  eliminate  uncertainty,  the 
law  itself  and  the  penalty  being  made  equally  plain. 

"And  the  business  men  of  the  country  desire  something  more  than 
that  the  menace  of  legal  process  in  these  matters  be  made  explicit 
and  intelligible.  They  desire  the  advice,  the  definite  guidance  and 
information  which  can  be  supplied  by  an  administrative  body,  an 
interstate  trade  commission. 


THE   CLAYTON   ACT  277 

"The  opinion  of  the  country  would  instantly  approve  of  such  a 
commission.  It  would  not  wish  to  see  it  empowered  to  make  terms 
with  monopoly  or  in  any  sort  to  assume  control  of  business,  as  if  the 
Government  made  itself  responsible.  It  demands  such  a  commission 
only  as  an  indispensable  instrument  of  information  and  publicity,  as 
a  clearing  house  for  the  facts  by  which  both  the  public  mind  and  the 
manager  of  great  business  undertakings  should  be  guided,  and  as  an 
instrumentality  for  doing  justice  to  business  where  the  processes  of 
the  courts  or  the  natural  forces  of  correction  outside  the  courts  are 
inadequate  to  adjust  the  remedy  to  the  wrong  in  a  way  that  will  meet 
all  the  equities  and  circumstances  of  the  case. 

"Producing  industries,  for  example,  which  have  passed  the  point 
up  to  which  combination  may  be  consistent  with  the  public  interest 
and  the  freedom  of  trade,  cannot  always  be  dissected  into  their  com- 
ponent units  as  readily  as  railroad  companies  or  similar  organizations 
can  be.  Their  dissolution  by  ordinary  legal  process  may  oftentimes 
involve  financial  consequences  likely  to  overwhelm  the  security  market 
and  bring  upon  it  breakdown  and  confusion.  There  ought  to  be  an 
administrative  commission  capable  of  directing  and  shaping  such  cor- 
rective processes,  not  only  in  aid  of  the  courts  but  also  by  independent 
suggestion  if  necessary.  .  .  . 

"There  is  another  matter  in  which  imperative  considerations  of 
justice  and  fair  play  suggest  thoughtful  remedial  action.  Not  only 
do  many  of  the  combinations  effected  or  sought  to  be  effected  in  the 
industrial  world  work  an  injustice  upon  the  public  in  general;  they 
also  directly  and  seriously  injure  the  individuals  who  are  put  out  of 
business  in  one  unfair  way  or  another  by  the  many  dislodging  and 
exterminating  forces  of  combination.  I  hope  that  we  shall  agree  in 
giving  private  individuals  who  claim  to  have  been  injured  by  these 
processes  the  right  to  found  their  suits  for  redress  upon  the  facts  and 
judgments  proved  and  entered  in  suits  by  the  Government  where  the 
Government  has  upon  its  own  initiative  sued  the  combinations  com- 
plained of  and  won  its  suit,  and  that  the  statute  of  limitations  shall  be 
suffered  to  run  against  such  litigants  only  from  the  date  of  the  con- 
clusion of  the  Government's  action.  It  is  not  fair  that  the  private 
litigant  should  be  obliged  to  set  up  and  establish  again  the  facts 
which  the  Government  has  proved.  He  cannot  afford,  he  has  not 
the  power,  to  make  use  of  such  processes  of  inquiry  as  the  Govern- 
ment has  command  of.  Thus  shall  individual  justice  be  done  while 
the  processes  of  business  are  rectified  and  squared  with  the  general 
conscience." 


278  THE   FEDERAL   TRADE   COMMISSION 

Other  recommendations  made  by  President  Wilson  in  this 
Address  need  not  here  detain  us.  . 

Immediately  following  President  Wilson's  Address,  Mr.  Clay- 
ton, Chairman  of  the  House  Judiciary  Committee,  announced 
four  tentative  bills. 

Tentative  bill  Number  1  proposed  to  add  several  sections  to 
the  Sherman  Act : 

Section  9  forbade  certain  kinds  of  price  discriminations,  and 
may  thus  be  called  the  progenitor  of  section  2  of  the  present 
Clayton  Act. 

Section  10  forbade  certain  kinds  of  exclusive  contracts  of 
sale  conditional  upon  discounts  and  rebates,  and  may  thus 
be  called  the  progenitor  of  section  3  of  the  present  Clayton 
Act. 

Section  12  provided  that  a  final  judgment  or  decree  in  behalf 
of  the  Government  in  a  Sherman  Act  suit  should  be  conclusive 
of  the  same  issues  of  law  in  any  other  proceeding  under  the 
Act.  This,  of  course,  was  intended  to  assist  private  complain- 
ants suing  for  treble  damages  under  section  7  of  the  Sherman 
Act.  It  also  provided  that  the  statute  of  limitations  for  such 
private  complainants  should  be  suspended  pending  a  suit  by 
the  Government  under  the  Sherman  Act.  This  section  may 
thus  be  called  the  progenitor  of  section  5  of  the  present  Clay- 
ton Act. 

Section  13  authorized  private  complainants  to  sue  for  in- 
junctive  relief  against  violations  of  the  Sherman  Act.  This 
may  thus  be  called  the  progenitor  of  sections  16,  17,  18  and  19 
of  the  present  Clayton  Act. 

Tentative  bill  Number  2  proposed  to  include  specifically 
within  the  provision  of  the  Sherman  Act  any  combination  or 
agreement  in  interstate  commerce 

"First :  To  create  or  carry  out  restrictions  in  trade  or  to  acquire  a 
monopoly  in  any  interstate  trade,  business  or  commerce. 

"Second:  To  limit  or  reduce  the  production  or  increase  the  price  of 
merchandise  or  of  any  commodity. 


THE   CLAYTON   ACT  279 

"Third:  To  prevent  competition  in  manufacturing,  making,  trans- 
porting, selling,  or  purchasing  of  merchandise,  produce,  or  any  com- 
modity. 

"Fourth:  To  make  any  agreement,  enter  into  any  arrangement,  or 
arrive  at  any  understanding  by  which  they,  directly  or  indirectly, 
undertake  to  prevent  a  free  and  unrestricted  competition  among  them- 
selves or  among  any  purchasers  or  consumers  in  the  sale,  production, 
or  transportation  of  any  product,  article  or  commodity." 

This  bill  also  provided  that  corporate  officers  and  agents 
authorizing  violations  of  the  Act  should  be  personally  punished. 
This  provision  may  thus  be  called  the  progenitor  of  section  14 
of  the  present  Clayton  Act. 

Tentative  bill  Number  3  proposed  to  prohibit  various  inter- 
locking directorships  and  relationships  in  railroad,  railroad 
equipment  companies,  banks,  trust  companies  and  public  ser- 
vice companies.  This  bill  may  thus  be  called  the  progenitor  of 
section  8  of  the  present  Clayton  Act. 

Tentative  bill  Number  4  proposed  to  prohibit  intercorporate 
stockholding  in  certain  circumstances ;  and  may  thus  be  called 
the  progenitor  of  section  7  of  the  present  Clayton  Act. 

Other  provisions  of  these  tentative  bills,  which  have  no  bear- 
ing upon  the  Clayton  Act  as  passed,  need  not  here  detain  us. 

Besides  these  tentative  bills  Mr.  Clayton  introduced  a  bill 1 
to  create  an  Interstate  Trade  Commission. 

Hearings  upon  all  these  bills  were  then  begun  and  continued 
for  several  weeks. 

On  February  16th,  Chairman  Adamson  of  the  House  Inter- 
state Commerce  Committee,  to  which  had  been  referred  Mr. 
Clayton's  Interstate  Trade  Commission  bill,  appointed  a  sub- 
committee to  draft  a  bill ;  and  on  March  14th,  Mr.  Covington, 
Chairman  of  the  Sub-Committee,  introduced  a  bill 2  which  was 
supported  by  the  entire  Sub-Committee,  Democrats  and  Repub- 
licans, and  by  President  Wilson. 

On  April  13th,  Mr.  Covington  introduced  a  revised  draft 3 

1  H.  R.  12,120,  63d  Cong.  »  H.  R.  14,631,  63d  Cong. 

3  H.  R.  15,613,  63d  Cong. 


280  THE   FEDERAL   TRADE   COMMISSION 

which  was  reported  with  a  report  of  the  whole  Committee  to 
the  House  on  April  14th.  All  the  Republican  members  of  the 
Committee  concurred  in  this  report.  Mr.  Stevens,  of  New 
Hampshire,  however,  a  Democratic  member  of  the  Com- 
mittee, submitted,  on  April  20th,  a  minority  report,  which 
foreshadowed  provisions  far  in  advance  of  any  in  the  bill  as 
reported.  Mr.  Stevens  said : 

"The  bill  reported  by  the  majority  of  the  committee  takes  no  steps 
toward  the  proper  regulation  of  competition.  The  new  commission 
has  no  more  power  than  the  old  Bureau  of  Corporations,  which  it 
supplants.  Apparently  a  large  part  of  its  time  will  be  devoted  to 
merely  aiding  the  Department  of  Justice  in  the  enforcement  of  the 
antitrust  acts.  The  Department  of  Justice  undoubtedly  needs  the 
aid  of  an  expert  board  in  its  work,  but  an  independent  trade  commis- 
sion should  have  a  far  broader  purpose. 

"My  own  views  of  the  scope  and  power  of  an  interstate  trade 
commission  are  embodied  in  H.  R.  15660.  This  bill  confers  upon 
the  trade  commission  all  the  powers  of  investigation  conferred  by 
the  committee  bill,  with  two  important  additions,  one  of  which  is 
fundamental. 

"(1)  The  commission  is  given  the  discretionary  power  to  require 
those  corporations  which  furnish  annual  reports  to  adopt  as  far  as  it  is 
practical  a  uniform  system  of  accounts.  Annual  reports,  unless  based 
upon  a  sound  and  uniform  system  of  accounting,  convey  little  infor- 
mation and  are  of  little  value  for  the  sake  of  comparisons.  This  pro- 
vision follows  the  present  Interstate  Commerce  Commission  law. 
The  work  of  the  Interstate  Commerce  Commission  has  been  made 
much  more  effective  by  giving  it  power  to  compel  the  railroads  to 
adopt  uniform  accounts.  I  see  no  reason  why  corporations  which  are 
doing  the  same  kind  of  business  might  not  be  classified  and  required 
to  adopt  uniform  account  systems  like  the  railroads. 

"  (2)  Section  10  of  H.  R.  15660  declares  unfair  and  oppressive  compe- 
tition to  be  unlawful  and  directs  the  commission  to  enforce  the  law.  I 
have  not  attempted  to  define  unfair  or  oppressive  competition.  That 
is  a  question  of  fact  to  be  decided  by  the  commission  the  same  way 
that  the  Interstate  Commerce  Commission  decides  what  rates  and 
practices  of  the  railroads  are  unreasonable  and  unfair.  Unless  the 
commission  is  to  have  some  power  to  regulate  competition  it  would 
seem  hardly  worth  while  to  abolish  the  Bureau  of  Corporations." 


THE   CLAYTON   ACT  281 

On  June  5th,  the  Interstate  Trade  Commission  bill,  as 
reported  by  the  Committee,  passed  the  House. 

In  the  Senate  the  Interstate  Trade  Commission  bill  was  re- 
ferred to  the  Senate  Committee  on  Interstate  Commerce.  On 
June  13th,  Senator  Newlands,  Chairman  of  the  Committee,  re- 
ported the  bill  with  amendments  embodying  substantially  the 
additions  that  Congressman  Stevens  had  proposed.  After  a 
spirited  debate  the  bill  passed  the  Senate  by  a  vote  of  53 
to  16. 

The  bill,  then  known  as  the  Federal  Trade  Commission  bill, 
then  went  to  conference,  from  whence  it  emerged  on  Septem- 
ber 4th,  and  was  thereupon  adopted,  and  on  September  26th 
was  signed  by  the  President. 

Meanwhile  Mr.  Clayton's  tentative  bills  above  described 
were  progressing. 

On  April  14th,  Mr.  Clayton  introduced  a  bill 1  which  in- 
cluded substantially  the  provisions  of  the  tentative  bills  herein- 
before discussed,  and  a  provision  that  nothing  in  the  antitrust 
laws  should  be  construed  to  forbid  the  existence  or  operation 
of  labor  and  agricultural  organizations,  and  also  provisions 
that  defined  the  practice  in  respect  of  injunctions.  On  May 
6th,  this  bill  was  reported  to  the  House  with  amendments. 
On  June  5th,  the  bill  passed  the  House. 

In  the  Senate  the  bill  was  referred  to  the  Senate  on  Judiciary. 
On  July  22d,  Senator  Culberson,  Chairman  of  the  Committee, 
reported  the  bill  to  the  Senate  with  amendments.  These  in- 
cluded provisions  giving  the  Trade  Commission  and  Interstate 
Commerce  Commission  authority  to  enforce  compliance  with 
sections  prohibiting  certain  kinds  of  price  discrimination,  inter- 
locking directorships,  intercorporate  stockholding  and  exclu- 
sive contracts.  The  Senate  debated  the  bill  from  July  22d 
until  September  2d.  It  struck  out  the  provisions  regarding 
price  discriminations  and  exclusive  contracts.  Later  it  put 
back  a  substitute  for  the  exclusive  contract  provision.  It 

1  H.  R.  15,657,  63d  Cong. 


282  THE   FEDERAL   TRADE   COMMISSION 

added  several  sections  relating  to  carriers.     On  September  2d, 
the  bill  as  amended  passed  the  Senate  by  vote  of  46  to  16. 

The  bill  then  went  to  conference  from  whence  it  emerged 
on  September  23d.  In  the  Senate  a  spirited  debate  followed, 
but  a  motion  to  recommit  was  lost  by  vote  of  35  to  25,  and 
the  bill,  as  reported  from  conference,  was  finally  agreed  to  on 
October  5th,  by  a  vote  of  35  to  24.  On  October  8th  the  bill, 
as  reported,  was  agreed  to  by  the  House  by  vote  of  244  to  54, 
and  on  October  15th  was  signed  by  the  President. 

II 

Several  remedies  have  been  added  to  the  Sherman  Act  by 
the  Clayton  Act. 

Section  4  of  the  Clayton  Act,  closely  following  the  language 
of  section  7  of  the  Sherman  Act,  provides : 

"That  any  person  who  shall  be  injured  in  his  business  or  property 
by  reason  of  anything  forbidden  in  the  anti-trust  laws  may  sue  there- 
for in  any  district  court  of  the  United  States  in  the  district  in  which 
the  defendant  resides  or  is  found  or  has  an  agent,  without  respect  to 
the  amount  in  controversy,  and  shall  recover  threefold  the  damages 
by  him  sustained,  and  the  cost  of  suit,  including  a  reasonable  attor- 
ney's fee." 

Section  12  of  the  Clayton  Act  provides  that 

"  ...  all  process  in  such  cases  may  be  served  in  the  district  of  which 
it  is  an  inhabitant,  or  wherever  it  may  be  found." 

The  "district  in  which  the  defendant  resides  or  is  found/' 
within  the  meaning  of  section  7  of  the  Sherman  Act,  is  the  dis- 
trict in  which  the  defendant,  at  the  commencement  of  the  action, 
resides,  or,  being  a  corporation,  is  domiciled,  or  where  the  defend- 
ant is  physically  present,  or,  being  a  corporation,  actually  has 
some  kind  of  agent,  or  is  actually  transacting  some  kind  of 
business  of  such  character  as  fairly  to  give  it  situs  in  that  dis- 
trict. This  district,  under  the  Sherman  Act,  was  the  only 


THE   CLAYTON   ACT  283 

district  in  which  the  defendant  could  be  sued;  save  only  in 
the  exceptional  cases  provided  for  in  section  5  of  the  Sherman 
Act,  when,  in  Government  suits,  "the  ends  of  justice  require 
that  other  parties  should  be  brought  before  the  court." 

This  was  not  appreciated  by  Congress.  In  the  report  of  the 
House  Judiciary  Committee  on  the  Clayton  Bill,  the  Com- 
mittee said  that  "  under  the  law  as  it  now  exists,  a  suit  against 
a  corporation  must  be  brought  in  the  district  whereof  it  is  an 
inhabitant."  The  same  error  was  repeated  in  the  report  of 
the  Senate  Judiciary  Committee.  These  reports,  and  the  dis- 
cussion of  these  sections  on  the  floor  of  Congress,  indicate  that 
the  language  of  section  7  of  the  Sherman  Act  was  departed 
from  only  in  the  attempt  to  arrive  at  the  result  that  had  already 
been  reached  by  the  Sherman  Act. 

The  words  above  quoted,  which  section  12  of  the  Clayton 
Act  has  added  to  the  law,  have  raised  a  question  of  interpreta- 
tion. And  it  has  been  held  by  one  court 1  that  the  legislative 
intent  to  expand  the  jurisdiction  of  the  court,  so  far  as  service 
of  initial  process  is  concerned,  beyond  that  defined  in  section  7 
of  the  Sherman  Act,  is  quite  clear : 

"Ordinarily,  process  either  of  a  state  court  or  a  District  Court  of 
the  United  States  cannot  be  served  beyond  the  territorial  limits  of 
the  state  or  of  the  district,  as  the  case  may  be.  A  non-resident  cor- 
poration may  be  doing  business  in  a  district,  and  therefore  theoretically 
be  liable  to  suit  therein;  but  if  it  is  not  represented  therein  by  an 
agent,  upon  whom  process  against  it  may  be  legally  served,  it  cannot, 
against  its  will,  be  brought  into  court.  The  framers  of  the  Clayton 
Act,  however,  have  taken  care  that  suits  authorized  by  it  shall  not 
be  so  obstructed.  .  .  . 

"A  corporation  may  be  sued  under  this  statute  where  it  transacts 
business.  It  cannot  escape  the  obligation  to  respond  because  no 
agent  of  it,  of  the  rank  and  character  qualified  to  be  served  for  it, 
can  be  there  found.  Suit  may  be  there  brought  and  process  may 
issue  to  a  district  in  which  it  cannot  deny  its  liability  to  service." 

1  Frey  &  Son  v.  Cudahy  Packing  Company,  228  Fed.  209,  D.  C.  Maryland, 
1915. 


284  THE   FEDERAL   TRADE   COMMISSION 

The  court,  accordingly,  held  that  suit  might  be  commenced 
in  Maryland,  by  service  of  summons  and  declaration  in  Illinois, 
against  an  Illinois  corporation  doing  business  in  Maryland. 

Section  5  of  the  Clayton  Act  provides  in  part  as  follows : 

"That  a  final  judgment  or  decree  hereafter  rendered  in  any  criminal 
prosecution  or  in  any  suit  or  proceeding  in  equity  brought  by  or  on 
behalf  of  the  United  States  under  the  anti-trust  laws  to  the  effect 
that  a  defendant  has  violated  said  laws  shall  be  prima  facie  evidence 
against  such  defendant  in  any  suit  or  proceeding  brought  by  any  other 
party  against  such  defendant  under  said  laws  as  to  all  matters  re- 
specting which  said  judgment  or  decree  would  be  an  estoppel  as 
between  the  parties  thereto :  Provided,  This  section  shall  not  apply 
to  consent  judgments  or  decrees  entered  before  any  testimony  has 
been  taken  :  Provided  further,  This  section  shall  not  apply  to  consent 
judgments  or  decrees  rendered  in  criminal  proceedings  or  suits  in  equity, 
now  pending,  in  which  the  taking  of  testimony  has  been  commenced 
but  has  not  been  concluded,  provided  such  judgments  or  decrees  are 
rendered  before  any  further  testimony  is  taken." 

As  passed  by  the  House,  the  Clayton  Act  made  such  decrees 
conclusive,  instead  of  prima  facie,  evidence  against  the  defend- 
ant, and  contained  none  of  these  provisos. 

Anxiety  regarding  the  constitutionality  of  the  measure  ap- 
pears to  have  prompted  the  change  from  "conclusive"  to 
"prima  facie,"  and  the  proviso  in  respect  of  defendants  that 
already  had  consented  to  decrees.  And  a  common-sense  atti- 
tude toward  defendants  desiring  hereafter  to  consent  to  decrees 
without  contest  appears  to  have  prompted  the  second  proviso. 

Such  consent,  under  certain  circumstances,  in  some  jurisdic- 
tions, may  make  the  judgment  or  decree  proper  evidence  as  an 
admission  against  interest,  and  available  against  the  defendant, 
in  suits  by  third  parties.1  This  possibility,  however,  existed 

1  Compare  the  following  cases  of  former  judgments  taken  upon  the  defend- 
ant's plea  of  guilty:  Clark  v.  Iroin,  9  Ohio  131 ;  1839.  Bradley  v.  Bradley,  11 
Maine  367 ;  1834.  Green  v.  Bedell,  48  New  Hampshire  546  ;  1869.  Schreiner  v. 
High  Ct.  of  F.,  35  111.  App.  576 ;  1890.  Crawford  v.  Bergen,  91  Iowa  675 ;  1894. 
23  Cyc.  1349.  Compare  the  following  case  of  former  judgment  taken  upon  the 
defendant's  plea  of  nolo  contendere:  Commonwealth  v.  Horton,  9  Pickering 


THE   CLAYTON   ACT  285 

before  the  Clayton  Act,  and  is  quite  unaffected  by  it.  Except 
for  this,  the  section  undoubtedly  constitutes  a  real  inducement 
to  defendants  to  consent  to  decrees  without  contest. 

Whether  this  section  will  ever  fulfill  to  private  complainants, 
in  their  actions  against  defendants  already  condemned  in  Gov- 
ernment suits  under  the  antitrust  laws,  the  full  measure  of 
assistance  that  it  seems  to  promise  may  well  be  doubted. 

The  limitation  of  the  effect  of  this  section  to  "matters  re- 
specting which  said  judgment  or  decree  would  be  an  estoppel 
as  between  the  parties  thereto"  requires  the  complainant  first 
to  ascertain  just  what  matters  have  been  conclusively  deter- 
mined and  become  res  adjudicata  between  the  Government  and 
the  defendant,  and  just  what  are  the  issues  in  respect  of  which 
there  is  an  estoppel  between  the  Government  and  the  defend- 
ant by  virtue  of  the  judgment  or  decree. 

"The  general  principle  announced  in  numerous  cases/'  said 
the  Supreme  Court  in  Southern  Pacific  Railroad  v.  United 
States, 1 

"is  that  a  right,  question,  or  fact  distinctly  put  in  issue  and  directly 
determined  by  a  court  of  competent  jurisdiction,  as  a  ground  of  re- 
covery, cannot  be  disputed  in  a  subsequent  suit  between  the  same 
parties  or  their  privies ;  and  even  if  the  second  suit  is  for  a  different 
cause  of  action,  the  right,  question,  or  fact  once  so  determined  must, 
as  between  the  same  parties  or  their  privies,  be  taken  as  conclusively 
established,  so  long  as  the  judgment  in  the  first  suit  remains  un- 
modified." 

(Mass.)  206,  1829.  Compare  the  following  cases  of  former  judgments  taken 
upon  the  defendant's  default :  Ellis  v.  Jameson,  17  Maine  235  ;  1840.  Cragin  v. 
Carleton,  21  Maine  492 ;  1842.  St.  Louis  Mut.  L.  Ins.  Co.  v.  Cravens,  69  Missouri 
72 ;  1878.  Eisenlord  v.  Clum,  126  N.  Y.  552,  559,  560 ;  1891.  Millard  v.  Adams, 
1  Misc.  (N.  Y.)  431 ;  1892.  Greenleaf:  Evidence,  Volume  1,  Sections  527a  and 
537;  Black:  Judgments,  Second  Edition,  Section  608;  Freeman:  Judgments, 
Fourth  Edition,  Section  417a ;  23  Cyc.  1288.  By  the  weight  of  authority,  how- 
ever, it  would  seem  that  such  former  judgment  can  be  qualified  or  explained 
or  rebutted  by  other  testimony :  Clark  v.  Irvin,  9  Ohio  131 ;  1839.  Green  v. 
Bedell,  48  New  Hampshire  546 ;  1869.  Schreiner  v.  High  Ct.  of  F.,  35  111.  App. 
576 ;  1890.  Crawford  v.  Bergen,  91  Iowa  675 ;  1894.  Commonwealth  v.  Horton, 
9  Pickering  (Mass.)  206 ;  1829.  But  see  Cragin  v.  Carleton,  21  Maine  492 ;  1842. 
1  168  U.  S.  1,  48,  1897. 


286  THE   FEDERAL   TRADE   COMMISSION 

In  the  absence  of  express  findings  of  fact  and  conclusions  of 
law  set  forth  in  the  judgment  or  decree  in  the  Government 
suit,  a  private  complainant,  whose  cause  of  action  arises  out  of 
transactions  constituting  only  a  fraction  of  the  Government's 
case,  would  seem  likely  to  find  great  difficulty  in  establishing 
that  this  judgment  or  decree  conclusively  determined,  or  made 
res  adjudicata,  or  estopped  from  dispute,  as  between  the  defend- 
ant and  the  Government,  the  issue  of  the  legality  of  the  par- 
ticular transaction  on  which  his  cause  of  action  is  predicated.1 
And  unless  he  can  establish  this,  the  judgment  or  decree  in 
the  Government  suit  would  seem,  under  any  reasonable  view 
of  section  5  of  the  Clayton  Act,  to  be  wholly  unavailable  as  evi- 
dence to  a  private  complainant  in  a  suit  against  the  defendant. 

The  constitutionality  of  the  section  was  disputed  in  Congress ; 
but  the  change  from  "conclusive"  to  "prima  facie"  has  gone 
far  to  reduce  the  possibility  that  the  section  will  be  declared 
unconstitutional . 

Section  5  of  the  Clayton  Act  further  provides : 

"Whenever  any  suit  or  proceeding  in  equity  or  criminal  prosecu- 
tion is  instituted  by  the  United  States  to  prevent,  restrain,  or  punish 
violations  of  any  of  the  anti-trust  laws,  the  running  of  the  statute  of 
limitations  in  respect  of  each  and  every  private  right  of  action  arising 

1  See  Richardson  v.  City  of  Boston,  19  How.  (U.  S.)  263,  267-268 ;  1856. 
Washington,  Alexandria  &  Georgetown  Steam-Packet  Company  v.  Sickles,  et  al., 
24  How.  (U.  S.)  333,  344-345 ;  1860.  Packet  Company  v.  Sickles,  5  Wall.  (U.  S.) 
580,  590-592 ;  1866.  Cromwell  v.  County  of  Sac,  94  U.  S.  351 ;  1876.  Davis  v. 
Brown,  94  U.  S.  423,  428-429;  1876.  Russell  v.  Place,  94  U.  S.  606,  608-610; 
1876.  Stewart  v.  Lansing,  104  U.  S.  505,  510;  1881.  Nesbit  v.  Riverside  Inde- 
pendent District,  144  U.  S.  610,  618-621 ;  1892.  Wilmington  &  Welden  Railroad 
v.  Alsbrook,  146  U.  S.  279,  302  ;  1892.  McComb  v.  Frink,  149  U.  S.  629,  639-642  ; 
1892.  Keokuk  &  Western  Railroad  Company  v.  Missouri,  152  U.  S.  301,  313- 
316;  1894.  De  Sollar  v.  Hanscome,  158  U.  S.  216,  221-222;  1895.  Stone  v. 
United  States,  167  U.  S.  178,  184,  186-189;  1897.  New  Orleans  v.  Citizens' 
Bank,  167  U.  S.  371,  389-400;  1897.  Dennison  v.  United  States,  168  U.  S.  241, 
249;  1897.  Southern  Pacific  Railroad  Company  v. United  States,  183  U.  S.  519, 
525,  528,  530,  432-534 ;  1902.  Lander  v.  Mercantile  Bank,  186  U.  S.  458,  476- 
477;  1902.  Yates  v.  Utica  Bank,  206  U.  S.  181,  183-184;  1907.  Virginia- 
Carolina  Chemical  Company  v.  Kirven,  215  U.  S.  252,  257-259 ;  1909.  Troxell. 
v.  Delaware,  Lackawanna  &  Western  Railroad  Company,  227  U.  S.  434,  440-443 ; 
1913. 


THE   CLAYTON   ACT  287 

under  said  laws  and  based  in  whole  or  in  part  on  any  matter  complained 
of  in  said  suit  or  proceeding  shall  be  suspended  during  the  pendency 
thereof." 

The  limitation  of  the  effect  of  this  provision  to  "any  matter 
complained  of  in  said  suit  or  proceeding"  raises  the  question 
as  to  whether  the  private  cause  of  action  is  really  based  upon 
a  matter  complained  of  in  the  Government  suit.  Unless  the 
particular  transaction,  on  which  the  private  cause  of  action  in 
whole  or  in  part  is  based,  is  specifically  referred  to  in  the  bill  or 
indictment  in  the  Government  suit,  this  question  is  almost  as 
difficult  as  that  raised  by  the  preceding  paragraph  of  section  5 
hereinbefore  discussed. 

Upon  the  score  of  constitutionality,  the  provisions  above 
quoted  would  seem  to  be  unexceptionable. 

Section  6  of  the  Clayton  Act  provides : 

"That  the  labor  of  a  human  being  is  not  a  commodity  or  article  of 
commerce.  Nothing  contained  in  the  anti-trust  laws  shall  be  con- 
strued to  forbid  the  existence  and  operation  of  labor,  agricultural,  or 
horticultural  organizations,  instituted  for  the  purposes  of  mutual  help, 
and  not  having  capital  stock  or  conducted  for  profit,  or  to  forbid  or 
restrain  individual  members  of  such  organizations  from  lawfully  carry- 
ing out  the  legitimate  objects  thereof;  nor  shall  such  organizations, 
or  the  members  thereof,  be  held  or  construed  to  be  illegal  combina- 
tions or  conspiracies  in  restraint  of  trade,  under  the  anti-trust  laws." 

The  word  "lawfully"  was  added  to  this  section  in  the  Senate. 
This  word,  and  the  words  "legitimate  objects,"  import  into 
this  section  all  the  qualifications  and  standards  of  all  the  anti- 
trust laws.  Considered  by  itself,  therefore,  this  section  would 
not  in  the  least  alter  the  law  as  heretofore  interpreted  and  en- 
forced in  respect  of  labor  organizations.  But  in  so  far  as  other 
sections  of  the  Clayton  Act  may  have  relaxed  the  law  in  respect 
of  labor  controversies,  this  section  has  clearly  changed  the  law 
in  respect  of  labor  organizations.  Considered,  therefore,  in  the 
light  of  the  discussion  hereinafter  of  section  20,  there  maybe 
concealed  under  the  platitudinous  language  of  section  6  a  sub- 


288  THE   FEDERAL   TRADE   COMMISSION 

stantial  relaxation  of  the  Sherman  Act  as  heretofore  interpreted 
and  enforced  by  the  courts  in  respect  of  labor  organizations. 

Section  13  of  the  Clayton  Act  provides  that  subpoenas  for 
witnesses  in  Government  suits  under  the  antitrust  laws  may 
run  into  any  district,  but  that  subpoenas  for  witnesses  in  civil 
suits  shall  not,  without  permission  of  the  trial  court,  run  more 
than  100  miles  outside  the  district  in  which  the  court  is  held. 
"Under  the  existing  law,"  said  the  Judiciary  Committees  of 
the  House  and  the  Senate,  "subpoenas  for  witnesses  in  such 
suits  run  only  in  the  district  in  which  they  are  issued."  This 
section,  therefore,  was  enacted  for  the  purpose  of  meeting  this 
situation. 

Section  15  of  the  Clayton  Act  closely  follows  the  language  of 
sections  4  and  5  of  the  Sherman  Act  in  authorizing  United 
States  District  Attorneys,  under  the  direction  of  the  Attorney 
General,  to  sue  to  restrain  violations  of  the  Clayton  Act. 

Section  16  of  the  Clayton  Act  changes  the  rule,  expressed 
by  the  Supreme  Court  in  Minnesota  v.  Northern  Securities  Com- 
pany,1 and  enforced  in  other  cases,  that  heretofore  has  re- 
stricted to  the  United  States  the  right  to  sue  for  an  injunction 
to  restrain  a  violation  of  the  Sherman  Act.  Except  as  against 
common  carriers  in  respect  of  matters  under  the  jurisdiction  of 
the  Interstate  Commerce  Commission,  section  16  of  the  Clay- 
ton Act  extends  this  right  of  suit  for  injunction,  in  respect  of 
all  the  antitrust  laws,  to  "any  person,  firm,  corporation,  or 
association." 

The  provisions  of  section  16  in  respect  of  giving  security 
against  damages  are  explicit  and  apparently  unambiguous.  In 
connection  with  subsequent  sections  of  the  Clayton  Act,  how- 
ever, they  have  given  rise  to  a  curious  confusion. 

Section  18  of  the  Clayton  Act  provides : 

"That,  except  as  otherwise  provided  in  section  16  of  this  Act,  no 
restraining  order  or  interlocutory  order  of  injunction  shall  issue,  except 
upon  the  giving  of  security  by  the  applicant  in  such  sum  as  the  court 

1194U.  S.  48;  1904. 


THE   CLAYTON   ACT  289 

or  judge  may  deem  proper,  conditioned  upon  the  payment  of  such 
costs  and  damages  as  may  be  incurred  or  suffered  by  any  party  who 
may  be  found  to  have  been  wrongfully  enjoined  or  restrained  thereby." 

Section  16  of  the  Clayton  Act,  it  will  be  recalled,  relates  to 
suits  for  injunction  by  private  complainants.  So  far  as  pre- 
liminary injunctions  are  concerned,  instead  of  providing  any 
exception  to  the  terms  of  section  18,  section  16  substantially 
paraphrases  the  provisions  of  section  18  in  respect  of  the  giving 
of  security. 

Section  18,  therefore,  would  appear  to  have  changed  the 
whole  practice  of  restraining  orders  and  interlocutory  orders  of 
injunction  in  Government  suits,  and  to  require  now  that  the 
Government  give  security  like  a  private  complainant.  Since 
no  means  exist  by  which  the  Government  can  do  this,  the  con- 
sequence would  seem  to  be  that  until  machinery  is  created  by 
which  the  Government  may  comply  with  the  sweeping  and 
apparently  absolute  requirements  of  section  18,  the  Govern- 
ment cannot  obtain  any  restraining  order  or  interlocutory  order 
of  injunction. 

Section  15  of  the  Clayton  Act  provides  that,  in  suits  by  the 
Government,  "pending  such  petition  and  before  final  decree, 
the  court  may  at  any  time  make  such  temporary  restraining 
order  or  prohibition  as  shall  be  deemed  just  in  the  premises/' 
But  since  exemption  from  giving  security  is  not  expressly  given 
by  this  section,  and  since  section  18  is  so  sweeping  and  absolute 
in  its  terms,  there  is  ground  for  contending  that  section  18 
governs  section  15,  and  that  the  provisions  of  the  latter  above 
quoted  cannot  be  invoked  until  means  are  provided  by  which 
the  Government  may  give  security  for  any  "restraining  order 
or  interlocutory  order  of  injunction"  that  it  may  obtain. 

In  the  only  case  that  has  thus  far  arisen  on  this  point,  how- 
ever,1 the  United  States  obtained  a  temporary  restraining 
order,  and  later  a  preliminary  injunction,  without  giving  any 

1  United  States  v.  United  Shoe  Machinery  Company,  D.  C.,  E.  D.,  Missouri, 
227  Fed.  507;  1915. 
U 


290  THE   FEDERAL   TRADE   COMMISSION 

security  whatsoever.  But  appeal  is  now  pending  from  this 
preliminary  injunction,  and  pending  the  appeal  the  defendants 
have  obtained  from  the  Circuit  Court  of  Appeals  a  stay  of  the 
preliminary  injunction  by  themselves  filing  a  substantial  bond.1 

Ill 

Influenced  apparently  by  the  desire  to  meet  criticisms  long 
directed  by  organized  labor  against  federal  court  injunctions, 
Congress  included  in  the  Clayton  Act  the  substance  of  two 
bills  2  relating  to  injunctions  and  procedure  in  contempt  cases, 
which  had  been  favorably  reported  by  the  House  Judiciary 
Committee  and  passed  by  the  House  in  the  preceding  session. 

Section  18,  relating  to  injunction  bonds,  has  already  been 
discussed. 

Section  17  provides  that  no  preliminary  injunction  shall  be 
granted  without  notice,  and  that,  unless  irreparable  injury  has 
been  shown,  no  temporary  restraining  order  shall  be  granted 
without  notice. 

Section  19  sets  forth  what  specific  allegations  must  be  in- 
cluded in  this  injunction. 

One  court  has  apparently  held  that  these  provisions  are  not 
binding  upon  the  Government,  when  it  applies  for  a  restrain- 
ing order  and  a  preliminary  injunction  in  a  Government  suit 
under  the  Clayton  Act.3  But  appeal  is  now  pending  from  this 
decision,  and  pending  the  appeal  the  defendants  have  obtained 
from  the  Circuit  Court  of  Appeals  a  stay  of  the  preliminary 
injunction  by  themselves  filing  a  substantial  bond.4 

Section  20  prescribes  the  conditions  under  which  injunctions 
shall  be  issued  in  cases  between  employer  and  employees.  The 

1  Upon  this  appeal,   decided  May,  1916,  this  preliminary  injunction  was 
vacated ;   but  the  court  did  not  discuss  the  point  above  mentioned. 
8  H.  R.  26,635  and  H.  R.  22,591. 

3  United  States  v.  United  Shoe  Machinery  Company,  D.  C.,  E.  D.,  Missouri, 
227  Fed.  507  ;  1915. 

4  Upon  this  appeal,   decided   May,    1916,  this  preliminary  injunction  was 
vacated ;    but  the  court  did  not  discuss  the  point  above  mentioned. 


THE   CLAYTON   ACT  291 

section  follows  the  best  preexisting  practice,  in  limiting  injunc- 
tions to  cases  where  they  are 

"necessary  to  prevent  irreparable  injury  to  property,  or  to  a  property 
right,  of  the  party  making  the  application,  for  which  injury  there  is 
no  adequate  remedy  at  law,  and  such  property  or  property  right  must 
be  described  with  particularity  in  the  application,  which  must  be  in 
writing  and  sworn  to  by  the  applicant  or  by  his  agent  or  attorney." 

But  the  section  breaks  new  ground  in  its  remaining  provisions : 

"And  no  such  restraining  order  or  injunction  shall  prohibit  any 
person  or  persons,  whether  singly  or  in  concert,  from  terminating  any 
relation  of  employment,  or  from  ceasing  to  perform  any  work  or  labor, 
or  from  recommending,  advising,  or  persuading  others  by  peaceful 
means  so  to  do ;  or  from  attending  at  any  place  where  any  such  per- 
son or  persons  may  lawfully  be,  for  the  purpose  of  peacefully  obtain- 
ing or  communicating  information,  or  from  peacefully  persuading  any 
person  to  work  or  to  abstain  from  working ;  or  from  ceasing  to  patron- 
ize or  to  employ  any  party  to  such  dispute,  or  from  recommending, 
advising,  or  persuading  others  by  peaceful  and  lawful  means  so  to  do ; 
or  from  paying  or  giving  to,  or  withholding  from,  any  person  engaged 
in  such  dispute,  any  strike  benefits  or  other  moneys  or  things  of  value ; 
or  from  peaceably  assembling  in  a  lawful  manner,  and  for  lawful  pur- 
poses ;  or  from  doing  any  act  or  thing  which  might  lawfully  be  done 
in  the  absence  of  such  dispute  by  any  party  thereto ;  nor  shall  any 
of  the  acts  specified  in  this  paragraph  be  considered  or  held  to  be  vio- 
lations of  any  law  of  the  United  States." 

These  provisions  legalize,  so  far  as  federal  law  is  concerned, 
transactions  which  may  clearly  be  acts  in  the  chain  of  a  con- 
spiracy in  violation  of  the  Sherman  Act  and,  therefore,  unlawful 
under  the  Sherman  Act  as  heretofore  interpreted  and  enforced 
by  the  courts.  How  far  these  provisions  may  prevent  the 
courts,  in  the  future,  from  holding  to  be  in  violation  of  the  Sher- 
man Act  labor  combinations  of  the  character  heretofore  de- 
nounced as  unlawful  in  Loewe  v.  Lawlor l  and  other  cases  will 
undoubtedly  be  a  much  litigated  question. 

i  208  U.  S.  283 ;  1908. 


292  THE   FEDERAL   TRADE   COMMISSION 

Sections  21  and  22  provide  that  when  the  act  contempt  of  an 
injunction  constitutes  also  a  criminal  offense  against  a  federal 
or  state  statute,  the  accused  shall  be  tried  by  the  court,  or,  upon 
demand  of  the  accused,  by  a  jury,  and  if  found  guilty  shall  be 
punished  by  fine  or  imprisonment  or  both. 

Section  23  provides  for  a  review  of  these  proceedings  in  the 
manner  heretofore  provided  in  criminal  cases,  and  for  admis- 
sion of  the  accused  to  bail. 

Section  24  provides : 

"That  nothing  herein  contained  shall  be  construed  to  relate  to 
contempts  committed  in  the  presence  of  the  court,  or  so  near  thereto 
as  to  obstruct  the  administration  of  justice,  nor  to  contempts  com- 
mitted in  disobedience  of  any  lawful  writ,  process,  order,  rule,  decree, 
or  command  entered  in  any  suit  or  action  brought  or  prosecuted  in 
the  name  of,  or  on  behalf  of,  the  United  States,  but  the  same,  and 
all  other  cases  of  contempt  not  specifically  embraced  within  section 
twenty-one  of  this  Act,  may  be  punished  in  conformity  to  the  usages 
at  law  and  in  equity  now  prevailing." 

Section  25  fixes  one  year  as  the  statute  of  limitations  in  con- 
tempt proceedings. 

IV 

The  substantive  provisions  of  the  Clayton  Act,  relating  to 
price  discriminations,  exclusive  contracts,  intercorporate  stock- 
holdings and  interlocking  directorships,  have  thus  far  proved 
the  most  controversial  provisions  of  the  act. 

Section  2  of  the  Clayton  Act  provides : 

"That  it  shall  be  unlawful  for  any  person  engaged  in  commerce,  in 
the  course  of  such  commerce,  either  directly  or  indirectly  to  dis- 
criminate in  price  between  different  purchasers  of  commodities,  which 
commodities  are  sold  for  use,  consumption,  or  resale  within  the  United 
States  or  any  Territory  thereof  or  the  District  of  Columbia  or  any 
insular  possession  or  other  place  under  the  jurisdiction  of  the  United 
States,  where  the  effect  of  such  discrimination  may  be  to  substantially 
lessen  competition  or  tend  to  create  a  monopoly  in  any  line  of  com- 
merce :  Provided,  That  nothing  herein  contained  shall  prevent  dis- 
crimination in  price  between  purchasers  of  commodities  on  account  of 


THE   CLAYTON   ACT  293 

differences  in  the  grade,  quality,  or  quantity  of  the  commodity  sold, 
or  that  makes  only  due  allowance  for  difference  in  the  cost  of  selling 
or  transportation,  or  discrimination  in  price  in  the  same  or  different 
communities  made  in  good  faith  to  meet  competition :  And  provided 
further,  That  nothing  herein  contained  shall  prevent  persons  engaged 
in  selling  goods,  wares  or  merchandise  in  commerce  from  selecting 
their  own  customers  in  bona  fide  transactions  and  not  in  restraint  of 
trade." 

Many  causes  contributed  to  the  provisions  above  quoted. 

By  1914,  nineteen  states  had  adopted  statutes  prohibiting 
price  discriminations  of  one  form  or  another,  and  most  of  these 
statutes  had  been  enacted  during  the  three  years  immediately 
preceding  the  passage  of  the  Clayton  Act.  In  cases  arising 
under  the  federal  and  state  antitrust  acts,  predatory  price  dis- 
criminations had  repeatedly  and  specifically  been  denounced 
by  the  courts.  In  the  proposed  antitrust  legislation  advocated 
prior  to  the  enactment  of  the  Clayton  Act  by  Congressman 
Lenroot,  Senator  La  Follette  and  Congressman  Stanley  —  all 
of  which  influenced  strongly,  though  unconsciously,  the  legis- 
lative temper  that  directed  the  course  of  legislation  in  1914,  at 
least  in  its  earlier  stages  —  specific  prohibitions  against  various 
kinds  of  price  discrimination  had  a  prominent  place.  So  hard, 
however,  was  it  found  to  take  care  of  the  legitimate  exceptions 
to  the  general  prohibition  against  price  discriminations  that 
the  Senate  voted  to  drop  the  section  entirely.  But  the  proposal 
already  had  too  much  popular  strength,  and  argument  to  the 
effect  that  the  generic  provisions  of  the  Sherman  Act,  and  sec- 
tion 5  of  the  Federal  Trade  Commission  Act  forbidding  unfair 
competition  already  reached  every  possible  evil  of  price  dis- 
crimination fell  on  deaf  ears.  The  conference  committee  hav- 
ing charge  of  the  Clayton  bill,  in  deference  to  a  very  popular 
superstition,  felt  obliged  to  legislate  expressly  against  price  dis- 
criminations, and  accordingly  put  back  the  section,  with  amend- 
ments, and  with  the  section  in  the  bill  its  report  was  finally 
adopted  by  the  Senate  as  well  as  the  House. 

Section  3  of  the  Clayton  Act  provides : 


294         .     THE   FEDERAL   TRADE   COMMISSION 

"That  it  shall  be  unlawful  for  any  person  engaged  in  commerce 
in  the  course  of  such  commerce,  to  lease  or  make  a  sale  or  contract 
for  sale  of  goods,  wares,  merchandise,  machinery,  supplies  or  other 
commodities,  whether  patented  or  unpatented,  for  use,  consumption 
or  resale  within  the  United  States  or  any  territory  thereof  or  the 
District  of  Columbia  or  any  insular  possession  or  other  place  under 
the  jurisdiction  of  the  United  States,  or  fix  a  price  charged  therefor, 
or  discount  from,  or  rebate  upon  such  price  on  the  condition,  agree- 
ment, or  understanding  that  the  lessee  or  purchaser  thereof  shall  not 
use  or  deal  in  the  goods,  wares,  merchandise,  machinery,  supplies  or 
other  commodities  of  a  competitor  or  competitors  of  the  lessor  or 
seller,  where  the  effect  of  such  lease,  sale  or  contract  for  sale  or  such 
condition,  agreement  or  understanding  may  be  to  substantially  lessen 
competition  or  tend  to  create  a  monopoly  in  any  line  of  commerce." 

Agitation  against  systems  of  limited  licenses  under  patents, 
popularly  associated  with  the  United  Shoe  Machinery  Com- 
pany, the  Motion  Picture  Patents  Company,  and  some  other 
concerns,  and  against  various  kinds  of  exclusive  contracts  and 
so-called  "tying"  contracts,  that  had  been  variously  charged  in 
several  antitrust  suits  and  that  had  led  to  legislation  in  Texas, 
Michigan,  Massachusetts  and  some  other  states  and  to  the 
reverberant  dissenting  opinion  of  Chief  Justice  White  in  Henry 
v.  A.  B.  Dick  Co.,1  was  probably  responsible  for  the  provisions 
above  quoted. 

Similar  provisions  had  a  prominent  place  in  the  proposals 
of  Congressman  Lenroot,  Senator  La  Follette,  and  Congress- 
man Stanley  before  the  passage  of  the  Clayton  Act.  Like  the 
price  discrimination  section,  however,  the  exclusive  contract 
section  was  found,  in  the  course  of  the  Senate  debate  on  section 
5  of  the  Federal  Trade  Commission  Act  forbidding  unfair  com- 
petition, to  be  probably  superfluous,  in  view  of  the  Sherman 
Act  and  this  section  of  the  Federal  Trade  Commission  Act. 
But  while  the  Senate  was  willing  to  drop  the  price  discrimina- 
tion section,  it  clung  to  the  exclusive  contract  section,  and  after 
wrestling  with  various  statutes  and  amendments,  the  Senate 

i  224  U.  S.  1 ;  1912. 


THE   CLAYTON   ACT  295 

adopted  the  section  which  was  amended  and  brought  into  its 
present  form  in  conference  and  finally  agreed  to  by  the  House 
and  Senate. 

Neither  the  price  discrimination  section  nor  the  exclusive 
contract  section  have  any  operation  except  where  their  effect 
"  may  be  to  substantially  lessen  competition  or  tend  to  create  a 
monopoly  in  any  line  of  commerce." 

At  the  outset,  therefore,  it  must  be  determined  what  this 
phrase  means. 

In  the  prototype  of  these  sections  in  Mr.  Clayton's  tentative 
bill  Number  1,  this  phrase  did  not  appear ;  but  in  tentative  bill 
Number  4,  where  certain  kinds  of  intercorporate  stockholding 
were  forbidden,  there  appear  the  words  "where  the  effect  of 
the  acquisition  is  to  eliminate  or  lessen  competition  between 
the  corporation  whose  stock  is  so  acquired  and  the  corpora- 
tion making  the  acquisition,  or  to  create  a  monopoly  of  any 
line  of  trade  in  any  section  or  community."  This  seems  to 
mark  the  genesis  of  the  phrase. 

In  the  form  in  which  it  passed  the  House,  these  sections  did 
not  contain  this  phrase,  nor  anything  that  can  fairly  be  called 
equivalent  to  it. 

The  words  "  may  .  .  .  create  a  monopoly  in  any  line  of  com- 
merce" have  clearly  the  same  meaning  as  the  words  "monop- 
olize, or  attempt  to  monopolize  .  .  .  any  part  of  the  trade 
or  commerce,"  in  the  Sherman  Act.  But  neither  the  phrase 
"  substantially  lessen  competition,"  nor  any  corresponding  lan- 
guage, appears  in  the  Sherman  Act. 

The  so-called  antitrust  provisions  of  the  Wilson  Tariff  Act 1 
referred  to  restraint  of  "competition"  in  a  manner  that  might, 
perhaps,  have  been  taken  to  be  in  contradistinction  to  "restraint 
of  lawful  trade."  Section  73  provides : 

"That  every  combination  ...  or  contract  is  hereby  declared  to 
be  ...  illegal,  and  void,  when  the  same  is  made  by  or  between  two 
or  more  persons  or  corporations  either  of  whom  is  engaged  in  import- 

1  U.  S.  28  Stat.  L.,  570,  August  27,  1894,  Chap.  349. 


296  THE   FEDERAL  TRADE   COMMISSION 

ing  any  article  from  any  foreign  country  into  the  United  States,  and 
when  such  combination,  conspiracy,  trust,  agreement,  or  contract  is 
intended  to  operate  "in  restraint  of  lawful  trade,  or  free  competition  in 
lawful  trade  or  commerce.  .  .  ."  (italics  mine) 

This  section  was  expressly  preserved  in  the  Dingley  Tariff 
Act.1 

The  section  above  quoted  was  amended  in  1913  2  by  insert- 
ing after  the  words  "corporations  either  of  whom"  the  words 
"as  agent  or  principal." 

The  foregoing  section  appears  never  to  have  been  judicially 
construed.  Whether  restraint  of  "  competition,"  in  this  section, 
is  intended  to  be  anything  different  from  "restraint  of  lawful 
trade"  is,  therefore,  at  best  doubtful. 

Language  corresponding  somewhat  to  the  phrase  "substan- 
tially lessen  competition"  appears  in  the  antitrust  statutes 
of  many  of  the  states.  Among  them  may  be  mentioned  Ala- 
bama, Arizona,  Arkansas,  California,  Colorado,  Florida, 
Georgia,  Idaho,  Illinois,  Indiana,  Iowa,  Kansas,  Kentucky, 
Louisiana,  Massachusetts,  Michigan,  Minnesota,  Mississippi,3 
Missouri,4  Montana,  Nebraska,  New  Jersey,  New  Mexico,  New 
York,  North  Carolina,  North  Dakota,  Ohio,  Oklahoma,  South 
Carolina,  South  Dakota,5  Tennessee,  Texas,  Utah,  Wisconsin 
and  Wyoming.  Examination  of  the  decisions  construing  the 
statutes  of  these  various  states  tends  to  support  the  view  that 
phrases  therein,  which  may  fairly  be  called  comparable  to  the 
phrase  "substantially  lessen  competition,"  are  simply  the 
equivalents  of  "restraint  of  trade  or  commerce"  and  "monopo- 
lize, or  attempt  to  monopolize,"  as  those  phrases  in  the  Sherman 
Act  have  been  interpreted  and  enforced  by  the  Supreme  Court 
of  the  United  States.  Cases  tending  to  support  this  proposi- 

i  30  U.  S.  Stat.  L.,  213,  Sec.  34. 

a  Act  of  February  12,  1913,  Chap.  370. 

3  See  especially  Grenada  Lumber  Company  v.  Mississippi,  217  U.  S.  433 ;  1910. 

4  See  especially  International  Harvester  Company  v.  Missouri,  234  U.  S.  199 ; 
1914. 

5  See  especially  Central  Lumber  Company  v.  South  Dakota,  226  U.  S.  157 ; 
1912. 


THE   CLAYTON   ACT  297 

tion  may  be  found  in  Alabama,  Georgia,  Indiana,  Michigan, 
Minnesota,  Mississippi,  Missouri,  Nebraska,  New  Jersey,  New 
York,  Ohio,  South  Carolina,  and  Tennessee.  Cases  deserving 
attention  because  of  their  apparent  disagreement  with  this 
view,  but  which  appear,  upon  analysis,  to  be  probably  distin- 
guishable may  be  found  in  Kansas 1  and  Texas.2 

Examination  of  the  decisions  under  the  Sherman  Act  affords 
further  confirmation  of  the  view  that  the  words  "substantially 
lessen  competition"  are  only  a  paraphrase  for  the  words" re- 
straint of  trade  or  commerce"  and  "monopolize,  or  attempt  to 
monopolize." 

Contracts  and  acts  that  "substantially  lessen  competition" 
have  repeatedly  been  held  to  be  in  violation  of  the  Sherman 
Act.  Thus  the  Sherman  Act  has  been  held  by  the  Supreme 
Court  to  forbid 

an  "agreement"  that  "does  in  fact  prevent  competition"  though  per- 
haps it  "purports  to  restrain  competition  ...  in  a  very  slight  degree 
and  on  a  single  point" ;  3 

"any  contract  .  .  .  where  the  natural  and  direct  effect  of  such  a  con- 
tract will  be,  when  carried  out,  to  directly,  and  not  as  a  mere  incident 
to  other  and  innocent  purposes,  regulate  to  any  substantial  extent 
interstate  commerce" ; 4 

"contracts  which  directly  and  substantially,  and  not  merely  indirectly, 
remotely,  incidentally  and  collaterally,  regulate  to  a  greater  or  less 
degree  commerce  among  the  several  states";  5 

"contracts  which  would  directly  and  substantially  and  not  as  a  mere 
incident  regulate  interstate  commerce";  6 

an  agreement  that  "directly  effects  a  restraint  of  interstate  commerce" 
though  "it  does  not  amount  to  one  per  cent  of  the  business  of  the 
dealers  in  tiles  in  that  city";  7 

1  See  especially  Smiley  v.  Kansas,  196  U.  S.  447 ;  1905. 

8  See  especially  National  Cotton  Oil  Company  v.  Texas,  197  U.  S.  115 ;  1905; 
and  Waters-Pierce  Oil  Company  v.  Texas,  212  U.  S.  86 ;  1909. 

3  United  States  v.  Joint  Traffic  Association,  171  U.  S.  505,  575 ;  1898  (italics 
mine). 

*Addyston  Pipe  and  Steel  Co.  v.  United  States,  175  U.  S.  211,228;  1900 
(italics  mine). 

6  Ibid.,  p.  229  (italics  mine).  •  Ibid.,  p.  229  (italics  mine). 

7  Montague  &  Company  v.  Lowry,  193  U.  S.  38,  46 ;  1904. 


298  THE   FEDERAL   TRADE   COMMISSION 

"any  combination  which  by  its  necessary  operation  destroys  or  re- 
stricts free  competition  among  those  engaged  in  interstate  commerce" ;  * 
acts  "which  operated  to  the  prejudice  of  the  public  interests  by  unduly 
restricting  competition  or  unduly  obstructing  the  due  course  of  trade"  ;  2 
acts  which  "injuriously  restrained  trade"  ; 3 

"destroying  or  greatly  abridging  the  free  operation  of  competition 
theretofore  existing",  even  though  "this  competitive  traffic  was  in- 
finitesimal when  compared  with  the  gross  amount  of  the  business 
transacted  by  both  roads"  and  "a  comparatively  small  part  of  the 
sum  total  of  all  traffic,  state  and  interstate  carried  over  them  "  because 
apparently,  in  this  case,  "it  was  by  no  means  a  negligible  part  but  a 
large  and  valuable  part,  of  interstate  commerce  which  was  thus 
directly  affected"  and  "was  in  a  substantial  part  the  subject  matter  of 
rivalry  and  competition  between  these  two  systems";4 
a  "concerted  scheme"  that  operates  "to  unduly  suppress  competition 
and  restrain  freedom  of  commerce  among  the  States"; 5 
a  combination  whose  "necessary  result  is  materially  to  restrain  trade 
between  the  States";6 

an  arrangement  that  "affords  evidence  of  an  intent  to  suppress  that 
competition  and  of  a  purpose  to  unduly  restrain  the  freedom  of  pro- 
duction, transportation  and  sale  of  the  product  at  tide- water  markets  " ;  6 
"artificial  conditions,  which  necessarily  impede  or  burden  the  due 
course  of  such  trade  or  commerce  or  restrict  the  common  liberty  to 
engage  therein";7 

"only  such  contracts  and  combinations  ...  as  by  reason  of  intent 
or  the  inherent  nature  of  the  contemplated  acts  prejudice  the  public 
interests  by  unduly  restricting  competition  or  unduly  obstructing  the 
course  of  trade"  ;* 

combinations  <(  unduly  restrictive  of  the  flow  of  commerce  or  unduly  re- 
strictive of  competition" ; 9 

1  Northern  Securities  Company  v.    United  States,  193  U.  S.  197,  337 ;  1904 
(italics  mine). 

2  United  States  v.  American  Tobacco  Co.  221  U.  S.  106,  179;  1911  (italics 
mine). 

3  Ibid.,  179  (italics  mine). 

4  United  States  v.  Union  Pacific  Railroad  Company,  226  U.  S.  61,  88-89; 
1912  (italics  mine). 

s  United  States  v.  Reading  Company,  226  U.  S.  324,  369  ;  1913  (italics  mine). 

*Ibid.,  370  (italics  mine). 

i  United  States  v.  Patten,  226  U.  S.  525,  541 ;  1913  (italics  mine). 

8  Nash  v.  United  States,  229  U.  S.  373,  376;  1913  (italics  mine). 

9  Eastern  States  Retail  Lumber  Dealers  Association  v.  United  States,  234  U.  S. 
600,  610;  1914  (italics  mine). 


THE   CLAYTON   ACT  299 

"practices  which  unduly  restrain  competition  or  unduly  obstruct  the  free 

flow  of  such  commerce" ; l 

acts  which  "unduly  suppress  competition";2 

acts  "which  were  unreasonably  restrictive  of  competitive  conditions";* 

That  the  standard  of  legality  set  up  in  the  Clayton  Act  by 
the  words  "substantially  lessen  competition''  is  none  other 
than  the  standard  established  by  the  Sherman  Act  in  the  words 
"restraint  of  trade  or  commerce"  and  "monopolize,  or  attempt 
to  monopolize"  is  the  view  of  practically  every  authority  thus 
far  expressed. 

Thus  in  Great  Atlantic  &  Pacific  Tea  Company  v.  Cream  of 
Wheat  Company  4  Judge  Hough  declared  that 

"there  is  nothing  in  the  Clayton  Act  to  compel  or  induce  courts  to 
hold  that  the  trade  restraint  referred  to  by  this  statute  differs  in  kind, 
quality,  or  degree  from  that  now  held  to  be  meant  by  the  Sherman 
Act.  .  .  .  Section  2  plainly  identifies  the  lessening  of  competition 
with  restraint  of  trade." 

Similarly,  Ex-President  Taft  in  his  Address  before  the  An- 
nual Meeting  of  the  American  Bar  Association,  on  October 
2, 1914,  stated: 

"The  words  'with  the  effect  substantially  to  lessen  competition'  are 
to  be  construed  in  the  light  of  then*  association  with  the  words  that  follow 
them  in  order  to  secure  some  guide  to  the  meaning  of  'substantially.' 
It  certainly  does  not  mean  any  lessening  of  competition,  however  small, 
because  its  ordinary  signification  prevents  that.  .  .  .  The  only  rea- 
sonable solution  would  seem  to  be  to  hold  that  it  means  such  substan- 
tial suppression  of  competition  as  to  constitute  a  real  restraint  of  trade 
and  a  tendency  to  monopolize." 

Against  this  view,  however,  two  considerations  are  likely  to 
be  urged : 

First,  that  the  sponsors  in  Congress  of  the  Clayton  bill  un- 
doubtedly intended  and  believed,  and  repeatedly  stated,  that 
its  substantive  provisions  go  further  than  the  Sherman  Act. 

1  Ibid.,  613  (italics  mine).  2  Ibid.,  614  (italics  mine). 

3  Standard  Oil  Co.  v.  United  States,  221  U.  S.  1,  58;  1911  (italics  mine). 

4  224  Fed.  566,  573;  1915;  affirmed.    227  Fed.  46;  1915. 


300  THE   FEDERAL   TRADE   COMMISSION 

Second,  that  if  Congress  had  intended  by  the  phrase  "sub- 
stantially lessen  competition"  to  set  up  merely  the  legal  stand- 
ard of  the  Sherman  Act,  it  would  have  used  the  language  of 
the  Sherman  Act,  viz.,  "restraint  of  trade  or  commerce"  and 
"monopolize,  or  attempt  to  monopolize,"  instead  of  painfully 
evolving  new  language. 

The  first  proposition  was  clearly  expressed  by  the  Senate 
Judiciary  Committee  in  its  report  upon  the  Clayton  Act : 

"It  is  well,  at  the  outset,  to  state  the  theory  of  the  bill,  both  as  it 
passed  the  House  of  Representatives  and  as  it  is  proposed  to  be 
amended,  for  the  general  scope  of  the  House  measure  is  unchanged. 
It  is  not  proposed  by  the  bill  or  amendments  to  alter,  amend,  or  change 
in  any  respect  the  original  Sherman  Anti-trust  Act  of  July  2,  1890. 
The  purpose  is  only  to  supplement  that  act  and  the  other  anti-trust 
acts  referred  to  in  section  1  of  the  bill.  Broadly  stated,  the  bill,  in 
its  treatment  of  unlawful  restraints  and  monopolies,  seeks  to  prohibit 
and  make  unlawful  certain  trade  practices  which,  as  a  rule,  singly 
and  in  themselves,  are  not  covered  by  the  act  of  July  2,  1890  or  other 
existing  anti-trust  acts,  and  thus,  by  making  these  practices  illegal, 
to  arrest  the  creation  of  trusts,  conspiracies,  and  monopolies  in  their 
incipiency  and  before  consummation.  Among  other  of  these  trade 
practices  which  are  denounced  and  made  unlawful  may  be  mentioned 
discrimination  in  prices  for  the  purpose  of  wrongfully  injuring  or 
destroying  the  business  of  competitors,  exclusive  and  tying  contracts, 
holding  companies,  and  interlocking  directorates  "  (italics  mine). 

This  view,  both  before  and  after  the  bill  had  assumed  the 
form  of  the  present  Clayton  Act,  was  repeatedly  expressed  on 
the  floor  of  Congress  by  sponsors  of  the  bill. 

This  view,  however,  seems  pretty  satisfactorily  disposed 
of  by  the  fact  that  when  the  Clayton  Act  was  passed, 
Congress,  as  appears  from  the  debates,  was  under  a  general 
misapprehension  that  the  Sherman  Act  had  proved  insufficient 
to  cover  "substantial  lessening  of  competition,"  and  therefore 
believed  that  language  different  from  the  Sherman  Act  was 
needed  in  order  to  accomplish  the  result,  which,  unperceived 
by  Congress,  the  Sherman  Act  had  already  accomplished. 


THE   CLAYTON   ACT  301 

The  second  proposition  depends  upon  the  familiar  rule  of 
statutory  construction  that  interpretations  supported  only  by 
elaborate  inference  and  argument  are  not  favored  by  the  courts 
when,  in  the  opinion  of  the  courts,  it  would  have  been  easy 
for  the  legislature  to  have  explicitly  expressed  such  meaning. 
This  rule,  expressed  in  the  maxim  "it  would  have  been  easy 
to  say  so,"  has  been  repeatedly  applied  by  the  Supreme  Court. 

Applying  now  this  rule  to  the  Clayton  Act  and  the  Sherman 
Act: 

Examination  of  the  phrase  "substantially  lessen  competition," 
in  sections  2  and  3  of  the  Clayton  Act,  in  comparison  with  the 
analogous  phrases  in  section  7,  develops  the  fact  that  in  section 
7,  relating  to  intercorporate  stockholding,  the  phrases  used  are 
"substantially  lessen  competition  between  the  corporation  whose 
stock  is  so  acquired  and  the  corporation  making  the  acquisition" 
and  "  substantially  lessen  competition  between  such  corporations, 
or  any  of  them,  whose  stock  or  other  share  capital  is  so  acquired." 

This  shows  that  Congress  had  no  intention,  in  the  phrase 
"substantially  lessen  competition"  to  mean  substantially  lessen 
competition  simply  between  any  two  concerns.  The  fact  that  "it 
would  have  been  easy  to  say  so,"  and  the  further  fact  that  in 
section  7  Congress  did  say  so,  conclusively  establish  this  propo- 
sition. 

But  the  maxim  "it  would  have  been  easy  to  say  so"  does  not, 
however,  go  to  the  extent  of  proving  that  "  substantially  lessen 
competition"  necessarily  means  something  different  from  "re- 
straint of  trade  or  commerce "  and  "  monopolize,  or  attempt  to 
monopolize,"  in  the  Sherman  Act.  For  when  the  Clayton  Act 
was  passed,  Congress,  as  appears  from  the  debates,  misappre- 
hended the  effect  of  the  Sherman  Act,  and  erroneously  believed 
that  it  did  not  cover  "substantial  lessening  of  competition," 
and  therefore  deemed  it  necessary  to  select  language  different 
from  the  Sherman  Act  in  order  to  accomplish  the  result,  which, 
unperceived  by  Congress,  the  Sherman  Act  had  already  ac- 
complished. 


302  THE   FEDERAL   TRADE   COMMISSION 

Several  other  clauses  in  the  price  discrimination  section  raise 
questions  of  interpretation : 

Does  the  exemption  of  discriminations  "made  in  good  faith 
to  meet  competition"  depart  from  the  standards  of  legality  set 
up  in  the  Sherman  Act? 

Probably  not,  according  to  the  rule  laid  down  in  Patterson  v. 
United  States  1  and  in  the  charge  of  Judge  Rellstab  to  the  jury 
in  Buckeye  Powder  Company  v.  E.  I.  du  Pont  de  Nemours  Pow- 
der Company,2  and  in  some  of  the  decrees  entered  upon  consent 
in  Government  suits  under  the  Sherman  Act.  But  the  point 
is  not  altogether  clear. 

Does  the  proviso  that  "nothing  herein  contained  shall  pre- 
vent persons  engaged  in  selling  goods,  wares  or  merchandise 
in  commerce  from  selecting  their  own  customers  in  bona  fide 
transactions  and  not  in  restraint  of  trade"  lay  down  an  ex- 
ception to  the  Sherman  Act  ? 

In  Great  Atlantic  &  Pacific  Tea  Company  v.  Cream  of  Wheat 
Company,3  Judge  Hough,  discussing  this  section  and  particu- 
larly this  clause  said: 

"Section  2  plainly  identifies  the  lessening  of  competition  with  re- 
straint of  trade.  (Cf.  the  body  of  the  section  with  the  last  exception.) 
But  price  discrimination  is  only  forbidden  when  it  'substantially' 
lessens  competition.  Construing  the  whole  section  together,  the  last 
exception  reads  in  effect  that  a  'vendor  may  select  his  own  bona  fide 
customers  providing  the  effect  of  such  selection  is  not  to  substantially 
and  unreasonably  restrain  trade.'" 

Judge  Hough's  conclusion  in  this  case,  that  the  Cream  of 
Wheat  Company  could  not  be  restrained  from  refusing  to  sell 
to  the  Great  Atlantic  &  Pacific  Tea  Company,  because  the 
latter  was  cutting  the  retail  price  of  Cream  of  Wheat,  hardly 
depends,  therefore,  upon  this  proviso  of  section  2.  But  it  sug- 
gested, perhaps,  the  line  taken  by  Judge  Hough  in  the  follow- 
ing much  quoted  passage  of  this  decision : 

i  222  Fed.  599,  650  (C.  C.  A.  6th  C.  March  13,  1915). 

»D.  C.  N.  J.,  Feb.  1914,  unreported,  affirmed  223  Fed.  881;  1915. 

3  224  Fed.  566,  574 ;  1915. 


THE   CLAYTON   ACT  303 

"  How  it  "can  be  called  substantial  and  unreasonable  restraint 
of  trade  to  refuse  to  deal  with  a  man  who  avowedly  is  to  use  his  deal- 
ing to  injure  the  vendor,  when  said  vendor  makes  and  sells  only  such 
an  advertisement  begotten  article  as  Cream  of  Wheat,  whose  fancy 
name  needs  the  nursing  of  carefully  handled  sales  to  maintain  an  out- 
put of  trifling  moment  in  the  food  market,  is  beyond  my  compre- 
hension. .  .  . 

"If  it  be  granted  that  section  2  does  apply,  and  that  defendant's 
selection  of  customers  results  in  unlawful  restraint  of  trade,  can  it  be 
possible  that  such  person's  evil  ways  are  to  be  amended,  not  by  stop- 
ping his  business,  but  by  adding  to  his  list  of  customers  one  or  many 
persons  chosen  by  Congress  ?  Numerous  individuals  and  corporations 
have  been  enjoined  from  restraining  the  trade  of  other  people,  no 
matter  how  flourishing  the  offenders'  trade  might  be,  nor  how  greatly 
the  general  volume  of  trade  had  increased  during  the  period  of  re- 
straint. But  never  before  has  it  been  urged  that,  if  J.  S.  made  enough 
of  anything  to  supply  both  Doe  and  Roe,  and  sold  it  all  to  Doe,  refus- 
ing even  to  bargain  with  Roe,  for  any  reason  or  no  reason,  such  con- 
duct gave  Roe  a  cause  of  action." 

The  same  proviso,  perhaps,  contributed  to  the  vigor  of  Judge 
Lacombe's  language1  in  the  opinion  of  the  Circuit  Court  of 
Appeals  affirming  Judge  Hough's  decision. 

"We  had  supposed  that  it  was  elementary  law  that  a  trader  could 
buy  from  whom  he  pleased  and  sell  to  whom  he  pleased  and  that  his 
selection  of  seller  and  buyer  was  wholly  his  own  concern.  'It  is  a 
part  of  a  man's  civil  rights  that  he  be  at  liberty  to  refuse  business  rela- 
tions with  any  person  whomsoever,  whether  the  refusal  rests  upon 
reason,  or  is  the  result  of  whim,  caprice,  prejudice  or  malice.'  Cooley 
on  Torts,  p.  278.  See  also  our  own  opinion  in  Greater  New  York  Film 
Company  v.  Biograph  Company,  203  Fed.  39 ;  1913.  Before  the  Sher- 
man Act  it  was  the  law  that  a  trader  might  reject  the  offer  of  a 
proposing  buyer,  for  any  reason  that  appealed  to  him :  —  It  might  be 
because  he  did  not  like  the  other's  business  methods,  or  because  he 
had  some  personal  difference  with  him,  political,  racial  or  social. 
That  was  purely  his  own  affair  with  which  nobody  else  had  any 
concern.  Neither  the  Sherman  Act,  nor  any  decision  of  the  Supreme 
Court  construing  the  same,  nor  the  Clayton  Act  has  changed  the 

1  Great  Atlantic  &  Pacific  Tea  Company  v.  Cream  of  Wheat  Company,  227 
Fed.  46,  49,  C.C.A.  2d  C.  November  10,  1915. 


304  THE   FEDERAL   TRADE   COMMISSION 

law  in  this  particular.  We  have  not  yet  reached  the  stage,  where 
the  selection  of  a  trader's  customers  is  made  for  him  by  the  govern- 
ment." 

Although  advanced  ground  in  denial  of  the  right  to  refuse  to 
deal  with  a  prospective  customer  under  circumstances  similar 
to  the  foregoing  has  repeatedly  been  taken  by  the  Department 
of  Justice  in  investigations  relating  to  complaints  under  the 
Sherman  Act,  it  is  noteworthy  that  in  proceedings  thus  far 
commenced  under  the  Sherman  Act  the  Department  has  denied 
this  right  only  in  cases  where  it  has  been  alleged  that  there  also 
existed  an  actual  agreement  to  maintain  prices  or  to  do  other 
things  that  in  themselves  were  more  colorably  in  violation  of 
the  Sherman  Act.  It  may  be  doubted,  therefore,  whether  this 
proviso  in  any  way  alters  the  rule  established  by  the  Sherman 
Act. 

Disposition  exists  in  some  quarters  to  regard  section  2  of  the 
Clayton  Act  as  somehow  relaxing  the  rule  of  the  Sherman  Act 
in  respect  of  price  discriminations.  That  this  would  be  the 
result,  if  the  standards  of  legality  set  up  in  this  section  were 
lower  than  those  of  the  Sherman  Act,  would  seem  to  be  clear, 
under  the  well-settled  rule  that  a  subsequent  special  statute 
(viz.  the  Clayton  Act),  following  a  prior  general  statute  (viz. 
the  Sherman  Act)  and  in  any  respect  inconsistent  therewith, 
supersedes  in  respect  of  all  inconsistent  provisions  the  prior 
general  statute.  Taking  section  2  altogether,  therefore,  in  the 
light  of  all  the  foregoing  considerations,  it  seems  probable  that 
it  merely  paraphrases,  without  any  substantial  change  what- 
soever, the  Sherman  Act  in  its  application  to  price  discrimina- 
tions. 

Section  3  of  the  Clayton  Act,  relating  to  exclusive  contracts, 
becomes  operative,  like  the  price  discrimination  section,  only 
where  the  effect  of  the  "lease,  sale,  or  contract  for  sale  or 
such  condition,  agreement  or  understanding  may  be  to  sub- 
stantially lessen  competition  or  tend  to  create  a  monopoly  in 
any  line  of  commerce."  For  the  reasons  above  set  forth,  there- 


THE   CLAYTON   ACT  305 

fore,  such  arrangements  would  seem  to  be  lawful,  unless  they 
offend  against  the  standards  of  legality  already  established  by 
the  Sherman  Act. 

Some  have  contended  that  the  inclusion  in  this  section  of 
patented,  as  well  as  unpatented,  commodities  extends  the  law 
beyond  the  area  covered  by  the  Sherman  Act. 

This  view  appears  to  rest  upon  one  or  the  other  of  two  popu- 
lar misconceptions : 

First,  the  popular  misconception  regarding  the  extent  to 
which  the  Sherman  Act,  in  its  relation  to  patented  articles, 
already  forbids  many  arrangements,  that  formerly  were  thought 
to  be  included  within  the  patent  protection,  but  latterly  have 
been  held  to  be  outside ;  and 

Second,  the  popular  misconception  regarding  the  extent  to 
which  the  patent  laws,  within  the  legitimate  scope  of  their 
operation,  prevent  the  courts,  upon  clear  constitutional  grounds, 
from  indulging  the  inference  that  Congress  intended  to  amend 
the  patent  laws. 

The  materials  for  the  correction  of  these  two  popular  mis- 
conceptions exist  in  several  recent  decisions  of  the  Supreme 
Court  and  the  lower  federal  courts,  and  need  not  here  be  dis- 
cussed.1 But  it  is  confidently  believed  that  they  amply  sup- 
port the  proposition  that,  so  far  as  patented  articles  are  con- 
cerned, the  rule  established  by  the  Sherman  Act  has  not  been 
altered  by  section  3  of  the  Clayton  Act. 

Section  3,  of  the  Clayton  Act  provides  that  it  shall  be  un- 
lawful to  lease,  sell,  or  contract  to  sell,  or  fix  a  price,  discount 
or  rebate  upon  "  the  condition,  agreement,  or  understanding  that 
the  lessee  or  purchaser  thereof  shall  not  use  or  deal  in  the  goods, 
wares,  merchandise,  machinery,  supplies  or  other  commodities 
of  a  competitor  or  competitors  of  the  lessor  or  seller." 

1  See  especially  Standard  Sanitary  Manufacturing  Co.  v.  United  States,  226 
U.  S.  20 ;  1913.  Virtue  v.  Creamery  Package  Co.,  227  U.  S.  8 ;  1913.  Winslow  v. 
United  States,  227  U.  S.  202 ;  1913.  Blount  Manufacturing  Co.  v.  Yale  &  Towne 
Manufacturing  Co.,  166  Fed.  555 ;  1908.  United  States  v.  United  Shoe  Machinery 
Company,  222  Fed.  349 ;  1915. 
X 


306  THE   FEDERAL   TRADE   COMMISSION 

Literally,  this  language  makes  the  section  operative  only 
when  the  customer  is  denied  absolutely  all  freedom  to  "use  or 
deal  in"  a  competitor's  goods.  Where,  as  in  Henry  v.  A.  B. 
Dick  Co.1  therefore,  the  notice  on  the  mimeograph  provided 
that  "this  machine  is  sold  by  the  A.  B.  Dick  Company  with  the 
lessee's  restriction  that  it  may  be  used  only  with  the  stencil 
paper,  ink  and  other  supplies  made  by  A.  B.  Dick  Company," 
it  would  follow  that  since  the  customer  was  not  denied  abso- 
lutely all  freedom  to  use  a  competitor's  stencil  paper,  ink  and 
other  supplies,  but  was  merely  forbidden  to  use  them  on  the 
Dick  machine,  and  was,  therefore,  left  free  to  use  them  in  any 
other  way,  the  notice  would  not  fall  within  this  clause  of  the 
section,  and  would,  therefore,  be  entirely  outside  the  pro- 
hibition of  the  law. 

If  this  be  the  interpretation  of  the  section  —  and  its  literal 
language  plainly  suggests  it  —  then  most  of  the  arrangements 
that  have  furnished  the  inspiration  for  this  section  plainly  fall 
wholly  outside  it. 

In  several  investigations  now  pending  in  the  Department  of 
Justice  and  the  Federal  Trade  Commission,  and  in  a  suit  which 
the  Government  has  recently  begun  under  this  section 2  the 
Government's  view  appears  to  be  that  this  clause  means  any 
"condition,  agreement,  or  understanding"  which,  in  the 
slightest  degree,  denies  to  the  customer  any  part  of  his  entire 
freedom  to  "use  or  deal  in"  a  competitor's  goods. 

But  this  construction  can  hardly  be  possible. 

A  competitor's  machinery,  to  illustrate,  may  be  capable  of 
four  practical  uses  —  A,  B,  C  and  D.  The  condition,  agree- 
ment or  understanding  may,  in  effect,  prevent  use  D,  and  leave 
uses  A,  B  and  C  intact  to  the  lessees.  Can  it  be  contended  that 
a  "condition,  agreement  or  understanding"  that  leaves  to  the 
lessee  all  these  wes  of  the  competitor's  machinery  is  a  "condi- 

1224U.  S.I;  191 2. 

2  United  States  v.  United  Shoe  Machinery  Company,  D.  C.  E.  D.,  Missouri, 
227  Fed.  507;  1915;  upon  appeal,  decided  May,  1916,  this  preliminary  in- 
junction was  vacated. 


THE   CLAYTON  ACT  307 

tion,  agreement  or  understanding  that  the  lessee  .  .  .  shall  not 
use  .  .  .  the  .  .  .  machinery  ...  of  a  competitor  .  .  .  of  the 
lessor  .  .  .?" 

Such  a  contention  would  involve  a  clear  distortion  of  the 
statute. 

A  competitor's  goods  may  be  capable  of  being  used  or  dealt 
in  by  the  customer  in  many  different  ways. 

The  customer  may  "use  or  deal  in"  them  anywhere,  any- 
how, and  any  time;  or  he  may  "use  or  deal  in"  them  only  in 
specified  places,  or  in  a  specified  manner,  or  under  specified 
conditions,  or  within  specified  periods. 

The  customer  may  "use  or  deal  in"  a  competitor's  goods 
unconditionally  and  with  absolute  freedom ;  or  he  may  be  for- 
bidden to  "use  or  deal  in"  them  within  a  particular  territory, 
or  in  a  particular  manner,  or  in  connection  with  a  particular 
plant  or  machine  or  under  certain  specified  conditions,  or 
during  a  particular  period. 

Take  other  illustrations : 

The  arrangement  may  simply  forbid  the  dealer  to  "use  or 
deal  in"  a  competitor's  goods  in  preference  to  the  seller's 
goods.  The  prohibition  of  the  section  would  hardly  apply  to 
this  case;  for  the  dealer  is  still  permitted  to  "use  or  deal  in" 
the  competitor's  goods  to  any  degree  he  desires,  short  of  giving 
them  the  preference  over  the  selling  goods. 

Again:  The  arrangement  may  forbid  the  dealer  to  push 
the  sale  of  a  competitor's  goods  as  hard  as  he  pushes  the  sale 
of  a  seller's  goods.  The  prohibition  of  the  section  would 
hardly  apply  to  this  case ;  because  the  dealer  is  still  permitted 
to  "use  or  deal  in"  the  competitor's  goods,  provided  he  does 
not  push  their  sale  as  hard  as  he  pushes  the  seller's  goods. 

Selection  and  predilection,  within  limitations  prescribed  by 
the  Sherman  Act  and  the  Clayton  Act,  are  still  legitimate  fac- 
tors in  trade  relations.  So  long  as  customers  and  dealers  are 
left  any  reasonable  degree  of  practical  freedom,  there  would 
seem  to  be  no  violation  of  section  3  of  the  Clayton  Act. 


308  THE   FEDERAL   TRADE   COMMISSION 

A  medium  course  in  construing  this  clause  of  section  3 
would  be  to  construe  it  as  meaning  any  "condition,  agreement 
or  understanding"  which  in  fact  denies  to  the  customer  sub- 
stantially all  practical  freedom  to  "use  or  deal  in"  a  competitor's 
goods. 

But  even  these  limited  classes  of  arrangements,  it  is  submitted, 
are  forbidden  by  section  3  of  the  Clayton  Act  only  when  they 
tend  to  restrain  trade  or  monopolize,  or  attempt  to  monopolize 
within  the  meaning  of  the  Sherman  Act.  The  conclusion  fol- 
lows, therefore,  that  this  section  simply  reaffirms  the  rule  of 
the  Sherman  Act  in  respect  of  exclusive  contracts. 

In  Elliott  Machine  Co.  v.  Center 1  a  lease  made  before  the 
passage  of  the  Act  was  held  to  be  in  violation  of  this  section. 
The  opinion,  however,  did  not  discuss  any  of  the  points  here- 
inbefore considered,  and  can  hardly  be  regarded  as  really  an 
authority  against  any  of  them. 

Section  7  of  the  Clayton  Act  provides : 

"That  no  corporation  engaged  in  commerce  shall  acquire,  directly 
or  indirectly,  the  whole  or  any  part  of  the  stock  or  other  share  capital 
of  another  corporation  engaged  also  in  commerce,  where  the  effect 
of  such  acquisition  may  be  to  substantially  lessen  competition  between 
the  corporation  whose  stock  is  so  acquired  and  the  corporation  making 
the  acquisition,  or  to  restrain  such  commerce  in  any  section  or  com- 
munity, or  tend  to  create  a  monopoly  of  any  line  of  commerce. 

"No  corporation  shall  acquire,  directly  or  indirectly  the  whole  or 
any  part  of  the  stock  or  other  share  capital  of  two  or  more  corpora- 
tions engaged  in  commerce  where  the  effect  of  such  acquisition,  or 
the  use  of  such  stock  by  the  voting  or  granting  of  proxies  or  other- 
wise, may  be  to  substantially  lessen  competition  between  such  cor- 
porations, or  any  of  them,  whose  stock  or  other  share  capital  is  so 
acquired,  or  to  restrain  such  commerce  in  any  section  or  community, 
or  tend  to  create  a  monopoly  of  any  line  of  commerce." 

Several  writers  have  suggested  that  these  provisions  have 
merely  adopted  the  standard  of  legality  in  respect  of  intercor- 
porate stockholding  established  by  the  Sherman  Act. 

^227  Fed.  124;  1915. 


THE   CLAYTON   ACT  309 

If  the  words  "between  the  corporation  whose  stock  is  so 
acquired  and  the  corporation  making  the  acquisition,"  and  the 
words  "between  such  corporations,  or  any  of  them,  whose 
stock  or  other  share  capital  is  so  acquired"  had  been  omitted 
from  these  provisions,  this  view  would  seem  sound.  But  with 
these  words  in  the  section,  it  appears,  for  reasons  hereinbefore 
stated,  that  a  standard  of  legality  much  stricter  than  the  Sher- 
man Act  has  here  been*  established. 

How  much  stricter  it  is  difficult  to  say. 

No  one  familiar  with  negotiations  for  the  simultaneous  acqui- 
sition of  several  incorporated  businesses  can  fail  to  see  what 
an  obstacle  this  provision  places  in  the  way  of  combinations  that 
would  clearly  be  permissible  under  the  Sherman  Act.  Several 
recent  decisions  have  plainly  indicated  that  combinations  of  com- 
petitors into  a  single  business  unit,  that  can  insure  economies  of 
operation,  and  efficiency  in  competition,  without  threatening  any 
domination  of  the  market,  are  not  in  violation  of  the  Sherman 
Act.1  Public  policy,  indeed,  would  seem  actually  to  favor  such 
combinations,  particularly  in  any  industry  where  to-day  a  single 
large  concern  overshadows  all  competitors.  But  so  long  as 
this  section  requires  a  combination  to  be  effected  through  pur- 
chase of  plants  and  property,  instead  of  through  acquisition  of 
stock  control,  the  difficulties  of  combining  small  competitors 
into  units  large  enough  to  compete,  on  equal  terms,  with  the 
biggest  concern  in  the  industry  are  greatly  accentuated. 

By  the  remaining  clauses  of  the  section,  corporations  are 
permitted  to  acquire  stock  for  investment  and  to  create  sub- 
sidiary corporations  for  carrying  on  legitimate  branches  of  their 
business ;  and  carriers  are  permitted  to  acquire  stock  in  branch 
lines;  and  all  acquisitions  of  stock  lawfully  acquired  before 
the  passage  of  the  Clayton  Act  are  excluded  from  its  operation. 

Section  8  of  the  Clayton  Act  provides  that  after  two  years 
from  the  passage  of  the  Act 

1  See  United  States  v.  United  Shoe  Machinery  Co.,  222  Fed.  349 ;  1911. 
United  States  v.  United  States  Steel  Corporation,  223  Fed.  55 ;  1912. 


310  THE   FEDERAL   TRADE   COMMISSION 

"no  person  shall  at  the  same  time  be  a  director  or  other  officer  or 
employee  of  more  than  one  bank,  banking  association  or  trust  com- 
pany, organized  or  operating  under  the  laws  of  the  United  States, 
either  of  which  has  deposits,  capital,  surplus,  and  undivided  profits 
aggregating  more  than  $5,000,000 ;  and  no  private  banker  or  person 
who  is  a  director  in  any  bank  or  trust  company,  organized  and  operat- 
ing under  the  laws  of  a  state,  having  deposits,  capital,  surplus,  and 
undivided  profits  aggregating  more  than  $5,000,000,  shall  be  eligible 
to  be  a  director  in  any  bank  or  banking  association  organized  or  operat- 
ing under  the  laws  of  the  United  States." 

Section  8  further  provides : 

"No  bank,  banking  association  or  trust  company,  organized  or 
operating  under  the  laws  of  the  United  States,  in  any  city  or  incor- 
porated town  or  village  of  more  than  two  hundred  thousand  inhabi- 
tants, as  shown  by  the  last  preceding  decennial  census  of  the  United 
States,  shall  have  as  a  director  or  other  officer  or  employee  any  private 
banker  or  any  director  or  other  officer  or  employee  of  any  other  bank, 
banking  association  or  trust  company  located  in  the  same  place :  Pro- 
vided :  That  nothing  in  this  section  shall  apply  to  mutual  savings  banks 
not  having  a  capital  stock  represented  by  shares  :  Provided  further,  That 
a  director  or  other  officer  or  employee  of  such  bank,  banking  associa- 
tion, or  trust  company  may  be  a  director  or  other  officer  or  employee 
of  not  more  than  one  other  bank  or  trust  company  organized  under 
the  laws  of  the  United  States  or  any  State  where  the  entire  capital 
stock  of  one  is  owned  by  stockholders  in  the  other;  And  provided 
further,  That  nothing  contained  in  this  section  shall  forbid  a  director 
of  class  A  of  a  Federal  reserve  bank,  as  defined  in  the  Federal  Re- 
serve Act  from  being  an  officer  or  director  or  both  an  officer  and 
director  in  one  member  bank." 

This  later  provision  has  been  construed  by  the  Federal 
Reserve  Board  and  the  Department  of  Justice  to  be  operative, 
like  the  preceding  provision  above  quoted,  only  after  two 
years  from  the  passage  of  the  Act. 

To  the  clause  above  quoted  there  was  added,  by  amendment  on 
May  15,  1916,  this  further  clause  :  "  And  provided  further,  That  noth- 
ing in  this  Act  shall  prohibit  any  officer,  director,  or  employee  of  any 
member  bank  or  class  A  director  of  a  Federal  reserve  bank,  who  shall 
first  procure  the  consent  of  the  Federal  Reserve  Board,  which  board 


THE   CLAYTON  ACT  311 

is  hereby  authorized,  at  its  discretion,  to  grant,  withhold,  or  revoke 
such  consent,  from  being  an  officer,  director,  or  employee,  of  not  more 
than  two  other  banks,  banking  associations,  or  trust  companies, 
whether  organized  under  the  laws  of  the  United  States  or  any  State, 
if  such  other  bank,  banking  association,  or  trust  company  is  not  in 
substantial  competition  with  such  member  bank.  The  consent  of  the 
Federal  Reserve  Board  may  be  procured  before  the  person  applying 
therefor  has  been  elected  as  a  class  A  director  of  a  Federal  reserve 
bank  or  as  a  director  of  any  member  bank." 

The  figures  and  provisos  set  forth  in  these  provisions  portray 
the  illogicality  of  this  class  of  legislation. 
Section  8  further  provides : 

"That  from  and  after  two  years  from  the  date  of  the  approval  of 
this  Act  no  person  at  the  same  time  shall  be  a  director  in  any  two  or 
more  corporations,  any  one  of  which  has  capital,  surplus,  and  un- 
divided profits  aggregating  more  than  $1,000,000  engaged  in  whole 
or  in  part  in  commerce,  other  than  banks,  banking  associations,  trust 
companies  and  common  carriers  subject  to  the  Act  to  regulate  com- 
merce, approved  February  fourth,  eighteen  hundred  and  eighty-seven, 
if  such  corporations  are  or  shall  have  been  theretofore,  by  virtue  of 
their  business  and  location  of  operation,  competitors,  so  that  the 
elimination  of  competition  by  agreement  between  them  would  con- 
stitute a  violation  of  any  of  the  provisions  of  any  of  the  anti-trust  laws." 

This  appears  to  forbid  interlocking  directorships  between 
corporations,  of  the  size  specified,  only  when  an  agreement 
between  such  corporations  not  to  compete  would  constitute 
a  violation  of  the  Sherman  Act. 

Section  10  of  the  Clayton  Act  provides  elaborate  regulation 
for  dealings  and  contracts  with  carriers  relating  to  securities, 
supplies,  construction,  and  maintenance,  to  the  amount  of 
more  than  $50,000  in  the  aggregate  in  any  one  year, 

"when  the  said  common  carrier  shall  have  upon  its  board  of  direc- 
tors or  as  its  president,  manager  or  as  its  purchasing  or  selling  officer, 
or  agent  in  the  particular  transaction,  any  person  who  is  at  the  same 
time  a  director,  manager,  or  purchasing  or  selling  officer,  of,  or  who 
has  any  substantial  interest  in  such  other  corporation,  firm,  partner- 
ship or  association.  ..." 


312  THE   FEDERAL   TRADE   COMMISSION 

In  this,  as  in  the  section  just  before  discussed,  there  seems  to 
be  nothing  to  prevent  a  director  of  a  holding  company,  law- 
fully holding  stock  in  its  subsidiary  companies  but  itself  not 
carrying  on  any  business,  from  serving  as  director  in  any  com- 
pany competing  with  one  of  such  subsidiaries,  or  in  any  rail- 
road dealing  with  any  such  subsidiaries.  But  in  so  far  as  the 
holding  company  actively  carries  on  business,  or  actively  super- 
vises or  participates  in  the  dealings  and  contracts  of  its  sub- 
sidiaries with  their  customers,  there  is  ground  for  the  appre- 
hension that  these  sections  may  possibly  apply,  upon  the  analogy 
of  the  decision  in  the  second  Commodities  Clause  Case,1  and 
some  of  the  cases  which  have  followed  it.2 

Other  clauses  of  the  Clayton  Act,  regarding  eligibility,  com- 
petitive bidding,  embezzlement,  personal  liability,  and  various 
provisos,  need  not  here  detain  us. 

V 

The  Federal  Trade  Commission  was  created  by  the  Federal 
Trade  Commission  Act  and  consists  of  five  commissioners. 
The  Commission  succeeded  to  the  powers,  proceedings,  and 
office  personnel  and  equipment  of  the  old  Bureau  of  Corpora- 
tions. It  has  jurisdiction  over  every  corporation  engaged  in 
interstate  or  foreign  commerce,  and  it  is  authorized,  among 
other  things, 

"  (a)  To  gather  and  compile  information  concerning,  and  to  investi- 
gate from  time  to  time  the  organization,  business,  conduct,  practices, 
and  management  of  any  corporation  engaged  in  commerce,  excepting 
banks  and  common  carriers  subject  to  the  Act  to  regulate  commerce, 
and  its  relation  to  other  corporations  and  to  individuals,  associations, 
and  partnerships. 

"(6)  To  require,  by  general  or  special  orders,  corporations  engaged 
in  commerce,  excepting  banks,  and  common  carriers  subject  to  the 

'      »  U.  8.  v.  Lehigh  Valley  R.  R.  Co.,  220  U.  S.  257 ;  1911. 

8  See  U.  S.  v.  Delaware,  Lackawanna  &  Western  R.  R.  Company,  238  U.  S. 
516 ;  1915.  Hocking  Valley  R.  R.  v.  N.  Y.  Coal  Co.,  207  Fed.  727 ;  1913  (C.  C.  A. 
6th  C.).  U.  S.  v.  Reading  Company,  226  Fed.  229;  1915  (D.  C.  E.  D.  Penn- 
sylvania). 


THE   CLAYTON   ACT  313 

Act  to  regulate  commerce  or  any  class  of  them,  or  any  of  them,  respec- 
tively, to  file  with  the  commission  in  such  form  as  the  commission 
may  prescribe  annual  or  special,  or  both  annual  and  special,  reports 
or  answers  in  writing  to  specific  questions,  furnishing  to  the  commis- 
sion such  information  as  it  may  require  as  to  the  organization,  busi- 
ness, conduct,  practices,  management,  and  relation  to  other  corpora- 
tions, partnerships,  and  individuals  of  the  respective  corporations 
filing  such  reports  or  answers  in  writing.  Such  reports  and  answers 
shall  be  made  under  oath,  or  otherwise,  as  the  commission  may  pre- 
scribe, and  shall  be  filed  with  the  commission  within  such  reasonable 
period  as  the  commission  may  prescribe,  unless  additional  time  be 
granted  in  any  case  by  the  commission.  .  .  . 

"(/)  To  make  public  from  time  to  time  such  portions  of  the  infor- 
mation obtained  by  it  hereunder,  except  trade  secrets  and  names  of 
customers,  as  it  shall  deem  expedient  in  the  public  interest;  and  to 
make  annual  and  special  reports  to  the  Congress  and  to  submit 
therewith  recommendations  for  additional  legislation ;  and  to  provide 
for  the  publication  of  its  reports  and  decisions  in  such  form  and 
manner  as  may  be  best  adapted  for  public  information  and  use. 
"  (</)  From  time  to  time  to  classify  corporations  and  to  make  rules 
and  regulations  for  the  purpose  of  carrying  out  the  provisions  of  this 
Act." 

Other  departments  and  bureaus  of  the  Government,  when 
directed  by  the  President,  must  furnish  to  the  Commission  all 
records,  papers,  and  information  in  their  possession  relating  to 
any  corporation  subject  to  the  Act,  and  must  detail  such 
officials  and  employees  to  the  Commission  as  the  President 
may  direct. 

For  all  purposes  of  the  Act,  the  Commission  is  given 

"access  to,  for  the  purpose  of  examination,  and  the  right  to  copy  any 
documentary  evidence  of  any  corporation  being  investigated  or  pro- 
ceeded against;  and  the  commission  shall  have  power  to  require  by 
subpoena  the  attendance  and  testimony  of  witnesses  and  the  produc- 
tion of  all  such  documentary  evidence  relating  to  any  matter  under 
investigation." 

The  Commission  may  compel  the  attendance  of  witnesses 
and  the  production  of  documentary  evidence,  and  disobedience 


314  THE   FEDERAL  TRADE   COMMISSION 

to  its  subpoenas  and  orders  in  this  regard  is  punishable  as  for 
contempt  in  the  federal  courts.  Documentary  evidence  is 
defined  to  include  "all  documents,  papers,  and  correspondence 
in  existence  at  and  after  the  passage  of  this  act."  Falsification 
of  reports  required  by  the  Commission  and  any  falsification, 
willful  omission,  willful  mutilation,  or  removal  of  any  such  docu- 
mentary evidence  is  punishable  by  fine  and  imprisonment. 

Doubtless  there  is  a  line  of  privacy  beyond  which  these 
tremendous  investigatory  powers  cannot  constitutionally  be 
exercised  by  the  Commission.1  Notwithstanding  the  disabili- 
ties of  corporations  it  is  believed  that  some  limitation  must  be 
implied  upon  these  sweeping  provisions.  In  Harriman  v.  Inter- 
state Commerce  Commission 2  the  Supreme  Court  dealt  with  an 
individual,  not  a  corporation;  but  in  this  case,  and  in  others 
therein  cited,  there  would  seem  to  be  authority  for  the  view 
that  even  corporations  might  have  some  relief  against  the  fullest 
exercise  of  these  tremendous  powers. 

Under  the  Bureau  of  Corporations 3  and  thus  far  under  the 
Commission,  this  question  has  happily  been  academic.  But 
with  the  increased  duties  of  the  Commission  it  may  at  any  time 
become  exceedingly  practical. 

The  Commission  also  has  power  to  investigate  the  manner 
in  which  decrees  in  Government  antitrust  suits  are  being 
carried  out ;  and  under  direction  of  the  President  or  Congress, 
to  investigate  and  report  the  facts  regarding  alleged  violations 
of  the  antitrust  laws;  and  under  direction  of  the  Attorney- 
General  to  investigate  and  make  recommendations  for  the  re- 
adjustment of  any  corporate  business  alleged  to  be  violating 
the  antitrust  laws ;  and  under  direction  of  the  courts  to  act  as 
Master  in  Chancery  to  ascertain  and  report  an  appropriate 
form  of  decree  of  dissolution.  Passing  reference  to  these  last 
two  powers  has  been  made  in  two  recent  decisions  under  the 

1  See  Hale  v.  Henkel,  201  U.  S.  75 ;  1906. 

2211  U.  S.  407;  1909. 

8  See  United  States  v.  Armour,  142  Fed.  808,  812 ;  1906. 


THE   CLAYTON  ACT  315 

antitrust  laws,  but  no  directions  thereunder  appear  as  yet  to 
have  resulted.1 
The  Commission  also  has  power 

"(h)  To  investigate,  from  time  to  time,  trade  conditions  in  and 
with  foreign  countries  where  associations,  combinations,  or  practices 
of  manufacturers,  merchants,  or  traders,  or  other  conditions,  may 
affect  the  foreign  trade  of  the  United  States,  and  to  report  to  Congress 
thereon,  with  such  recommendations  as  it  deems  advisable." 

Recommendations,  following  an  investigation  recently  made 
under  this  provision,  are  promised  by  the  Commission  for  the 
near  future. 

Section  5  of  the  Federal  Trade  Commission  Act  provides 
that  "unfair  methods  of  competition  in  commerce  are  hereby 
declared  unlawful." 

Behind  these  words  lies  a  field  of  litigation  which  will  prob- 
ably prove  as  wide  and  hard-fought  as  the  Sherman  Act. 

In  the  Trade  Commission  bill,  as  reported  to  the  Senate 
by  Senator  Newlands,  Chairman  of  the  Senate  Interstate 
Commerce  Committee,  the  words  "unfair  competition"  were 
used  instead  of  "unfair  methods  of  competition." 
f  In  the  Senate  debate  upon  this  section  —  which  in  duration, 
acuteness,  and  research  did  justice  to  the  best  traditions  of  the 
Senate  —  a  number  of  definitions  of  "unfair  competition"  were 
ventured  by  sponsors  of  the  bill.2 

Senator  Newlands'  definition  included 

Substantially  all  violations  of  the  antitrust  laws,  including  even 
wrongs  arising  from  interlocking  directorates  and  intercorporate 
relationships. 

1  In  U.  S.  v.  Corn  Products  Refining  Company  (D.  C.  S.  D.  N.  Y.,  decided  June 
24,  1916,  not  yet  reported)  Judge  Learned  Hand  has  since  made  such  a  direction. 

2  This  debate  I  have  summarized  elsewhere  in  my  article  entitled  "Unfair 
Methods  of  Competition,"  Yale  Law  Journal,  vol.  XXV,  No.   1,  pp.  20-41, 
November,  1915,  from  which  I  have  abstracted  the  various  definitions  herein- 
after discussed.     The  references  in  the  footnotes  of  that  article  to  the  pages 
of  the  Congressional  Record  refer  to  the  temporary  and  not  the  permanent 
paging  of  the  Congressional  Record. 


316  THE   FEDERAL  TRADE   COMMISSION 

All  other  acts  affecting  a  competitor,  for  which  any  remedy  "lies 
either  at  law  or  in  equity." 

All  other  acts  affecting  a  competitor  that  are  "against  public 
morals,"  though  heretofore  quite  lawful  and  not  forbidden  by  the 
Sherman  Law  or  any  other  law. 

Senator  Cummins'  definition  was 

"Imposture,"  or  any  "vicious  practice  or  method  .  .  .  that  has  a 
tendency  to  affect  the  people  of  the  country  or  to  be  injurious  to  their 
welfare,"  though  heretofore  quite  lawful  under  the  Sherman  Law. 

Senator  Robinson's  definition  was 

The  act  of  passing  off  one's  business  or  goods  for  another's. 
"Unfair  competition"  from  an  economic  point  of  view. 
All  other  acts  which  "normal  business  men"  might  deem  incon- 
sistent with  "efficiency  in  producing  and  in  selling." 

Senator  Robinson  elaborated  his  definition  as  follows : 

"Mr.  William  S.  Stevens,  of  Columbia  University,  in  an  article 
called  to  my  attention  by  Congressman  Stevens,  of  New  Hampshire, 
who  introduced  this  provision  in  the  House,  discusses  the  subject  of 
*  unfair  competition'  from  an  economic  point  of  view,  and  classifies 
according  to  their  elementary  characteristics  11  forms  of  'unfair  com- 
petition' as  follows :  I  read  now  from  his  article  on  page  283  of  the 
Political  Science  Quarterly  for  June,  1914  : 

"1.   Local  price  cutting. 

"2.   Operations  of  bogus  'independent'  concerns. 

"3.   Maintenance  of  'fighting  ships'  and  'fighting  brands/ 

"4.  Lease,  sale,  purchase,  or  use  of  certain  articles  as  a  condition 
of  the  lease,  sale,  purchase,  or  use  of  other  required  articles. 

"5.   Exclusive  sales  and  purchase  arrangements. 

"6.   Rebates  and  preferential  contracts. 

"7.  Acquisition  of  exclusive  or  dominant  control  of  machinery  or 
goods  used  in  the  manufacturing  process. 

"8.   Manipulation. 

"9.   Black  lists,  boycotts,  white  lists,  etc. 

"  10.   Espionage  and  use  of  detectives. 

"11.   Coercion,  threats,  and  intimidation. 

"The  terms  used  fairly  define  without  detailed  discussion  the  various 
practices  thus  classified,  and  undoubtedly  embrace  nearly  all  of  the 
methods  of  'unfair  competition'  now  in  use.  .  .  . 


THE   CLAYTON   ACT  317 

"Nearly  all  normal  business  men  can  distinguish  between  'fair 
competition'  and  'unfair  competition.'  Efficiency  is  generally  re- 
garded as  the  fundamental  principle  of  power-efficiency  in  produc- 
ing and  in  selling,  while  oppression  or  advantage  obtained  by  decep- 
tion or  some  questionable  means  is  the  distinguishing  characteristic  of 
'unfair  competition.'" 

Senator  Saulsbury  defined  it  as 

All  "customs  of  merchants"  which  are  in  violation  of  "the  ethics 
of  a  profession  or  a  business." 

According  to  Senator  Walsh  it  included 

Every  act  of  passing  off  one's  business  or  goods  for  another's. 
All  other  acts  comprehended  within  the  meaning  which  "unfair 
competition"  has  to-day  in  common  parlance  and  in  literature. 

Senator  Williams'  definition  boiled  down  to 

All  unfair  methods  of  stifling  competition. 
Senator  Hollis'  definition  included 

"Means  of  restraining  or  monopolizing  trade"  heretofore  forbidden 
by  the  Sherman  Law. 

Methods  which  fall  short  of  violating  the  Sherman  Law  but  which 
"the  proposed  trade  commission  .  .  .  decides  .  .  .  may  lead  to 
monopoly  or  restraint  of  trade." 

All  other  acts  which  interfere  with  "efficiency." 

From  all  these  various  definitions,  offered  by  sponsors  of  the 
bill,  unfair  competition  would  seem  to  include 

Every  act  of  passing  off  one's  business  or  goods  for  another's. 

All  methods  of  competition  tending  to  restraint  of  trade  or  monopoly 
which  have  been  forbidden  by  the  Sherman  Law. 

Substantially  all  violations  of  the  antitrust  laws,  including  even 
wrongs  arising  from  interlocking  directorates  and  allied  incorporate 
relationships. 

All  unfair  methods  of  stifling  competition. 

All  other  acts  which  the  "commission  .  .  .  decides  .  .  .  may  lead 
to  monopoly  or  restraint  of  trade"  though  not  now  forbidden  by  the 
Sherman  Act. 

All  other  acts  affecting  a  competitor  for  which  "a  remedy  lies  either 
at  law  or  in  equity." 


318  THE   FEDERAL   TRADE   COMMISSION 

All  other  acts  which  either  affect  a  competitor  and  are  "against 
public  morals,"  or  in  any  way  interfere  with  economic  "efficiency," 
though  heretofore  quite  lawful  and  not  forbidden  by  the  Sherman  law 
or  by  any  other  law. 

The  provision  regarding  " unfair  competition"  was  vigorously 
assailed  on  the  floor  of  the  Senate  by  Senators  Thomas,  Clapp, 
Pomerene,  Sutherland,  Borah,  Nelson,  Colt,  Brandegee,  Ster- 
ling, McCumber  and  Reed  as  either  limited  to  "passing  off" 
one's  business  or  goods  for  another's,  or  as  so  hopelessly  in- 
definite as  to  be  absolutely  meaningless.  Sponsors  of  the  bill 
cited,  during  the  course  of  the  debate,  various  decisions  in  which 
"unfair  competition"  or  "unfair  methods  of  competition"  or 
"unfair"  practices  had  been  mentioned,1  and  various  other 
decisions  in  which  "fair  competition"  had  been  mentioned2 
and  a  decree  in  which  "unfair  competition"  had  been  enjoined  3 
and  a  decree  in  which  "fair  competition"  had  been  mentioned  4 
and  various  decrees  in  which  neither  "unfair"  nor  "fair"  com- 
petition had  been  mentioned,  but  certain  specified  methods  of 
competition  had  been  particularly  enjoined.5  But  these  vari- 

1  Standard  Oil  Co.  v.  United  States,  221  U.  S.  1,  43;  1911.    State  v.  Central 
Lumber  Co.  123  N.  W.  (S.  D.)  504,  509,  affirmed  Central  Lumber  Co.  v.  South 
Dakota,  226  U.  S.  158 ;  1913.     United  States  v.  American  Naval  Stores  Co.,  172 
Fed.  455,  459 ;  1909.     Ware-Kramer  Tobacco  Co.  v.  American  Tobacco  Co.,  180 
Fed.  160;   1910.    United  States  v.  Patterson,  205  Fed.  292,  301 ;  1913;  reversed 
222  Fed.  599 ;  1915.     Beside  these  might  be  cited  the  cases  of  United  States  v. 
American  Tobacco  Co.,  221  U.  S.  106,  179 ;  1911.    Buckeye  Powder  Co.  v.  E.  I. 
du  Pont  de  Nemours  Powder  Co.,  D.  C.  N.  J.  Feb.  25,  1914,  Judge  Rellstab's 
charge  to  the  jury,  not  reported,  affirmed  in  223  Fed.  881 ;  1915.     United  States 
v.  Keystone  Watch  Case  Co.,  218  Fed.  502,  515 ;    1915. 

2  In  re  Greene,  52  Fed.  104 ;   1892.     Ware-Kramer  Tobacco  Co.  v.  American 
Tobacco  Co.,  180  Fed.  160 ;    1910.    State  v.  Fairmont  Creamery  Co.,  153  Iowa 
702,  709-710;  1912.     Beside  these  might  be  cited  the  case  of  Buckeye  Powder 
Co.  v.  E.  I.  du  Pont  de  Nemours  Powder  Co.,  supra. 

3  United  States  v.  Central  West  Publishing  Co.,  D.  C.  N.  D.  111.,  August  3, 
1912. 

4  United  States  v.  General  Electric  Co.,  N.  D.  Ohio,  October  12,  1911. 

6  United  States  v.  Aluminum  Co.  of  America,  D.  C.  W.  D.  Pa.,  June  7,  1912. 
United  States  v.  American  Coal  Products  Co.  D.  C.  S.  D.  N.  Y.,  March  4,  1913. 
Beside  these  might  be  cited  the  decrees  in  United  States  v.  Nome  Retail  Grocers' 
Association,  D.  C.  Alaska ;  November  5,  1905.  United  States  v.  National  Asso- 
ciation of  Retail  Druggists,  C.  C.  Ind.,  May  9,  1907.  United  States  v.  Southern 


THE   CLAYTON   ACT  319 

ous  decisions  and  decrees,  all  of  which  were  rendered  either 
under  the  Sherman  Act  or  under  one  or  another  of  the  various 
state  statutes  against  price  discrimination,  indicated  to  the 
minds  of  these  opposing  Senators  no  clear  definition  of  "unfair 
competition."  They  merely  convinced  them  of  the  importance 
of  adhering  strictly  to  the  specific,  well-defined  language  of  the 
Sherman  Act  and  the  various  state  statutes  against  price  dis- 
crimination. Restraint  of  trade  had  long  been  a  definite  term 
in  the  law,  and  price  discrimination  was  easily  defined.  "Un- 
fair competition,"  in  their  opinion,  had  acquired  no  such 
definiteness. 

Nevertheless  the  Trade  Commission  bill,  with  this  provision 
declaring  "unfair  methods  of  competition"  unlawful,  passed 
the  Senate  by  vote  of  53  to  16. 

In  conference,  the  words  "unfair  methods  of  competition" 
were  substituted  for  the  words  "unfair  competition,"  for  the 
purpose,  apparently,  of  preventing  the  clause  from  being 
limited  to  cases  of  "passing  off"  one's  business  or  goods  for 
another's. 

The  enforcement  of  this  section,  and  of  the  sections  of  the 
Clayton  Act  relating  to  price  discriminations,  exclusive  con- 
tracts, intercorporate  stockholding  (except  where  applicable 
to  carriers,  when  the  Interstate  Commerce  Commission  takes 
jurisdiction)  and  interlocking  directorships  (except  where  ap- 

Wholesale  Grocers'  Association,  C.  C.  N.  D.  Alabama,  October  17,  1911.  United 
States  v.  Standard  Sanitary  Manufacturing  Co.,  C.  C.  Md.,  November  25,  1911. 
United  States  v.  Standard  Wood  Co.,  C.  C.  S.  D.  N.  Y.,  March  11,  1912.  United 
States  v.  Pacific  Coast  Plumbing  Supply  Association,  C.  C.  S.  D.  Cal.,  January 
6,  1912.  United  States  v.  Philadelphia  Jobbing  Confectioners1  Association,  E.  D. 
Pa.,  February  17,  1913.  United  States  v.  Burroughs  Adding  Machine  Co.,  D.  C. 
Mich.,  March  3,  1913.  United  States  v.  New  Departure  Manufacturing  Co., 
D.  C.  W.  D.  N.  Y.,  May  27,  1913.  United  States  v.  Elgin  Board  of  Trade,  D.  C. 
N.  D.,  111.,  April  27,  1914.  United  States  v.  National  Wholesale  Jewellers'  Asso- 
ciation, D.  C.  S.  D.  N.  Y.,  June  30,  1914.  United  States  v.  Eastern  States  Lum- 
ber Dealers  Association,  C.  C.  S.  D.  N.  Y.,  March  1,  1913,  affirmed  234  U.  S. 
600 ;  1914.  United  States  v.  Hamburg-Amerikanische  Packetfahrt  Actien-Gesell- 
schaft,  and  others,  D.  C.  S.  D.  N.  Y.,  October  13,  1914,  216  Fed.  971 ;  1914,  but 
reversed  because  now  moot  in  consequence  of  the  European  War,  239  U.  S.  1 ; 
1915. 


320  THE   FEDERAL   TRADE   COMMISSION 

plicable  to  banks  and  carriers,  when  the  Federal  Reserve  Board 
and  the  Interstate  Commerce  Commission  respectively  take 
jurisdiction)  is  vested  in  the  Federal  Trade  Commission.  The 
jurisdiction  of  the  Commission  in  respect  of  "  unfair  methods  of 
competition"  is  exclusive;  but  in  respect  of  the  sections  of  the 
Clayton  Act  above  mentioned,  it  is  concurrent  with  proceed- 
ings by  the  Attorney  General  and  by  private  complainants  in 
the  federal  courts. 

The  procedure  of  the  Commission  in  respect  of  "unfair 
methods  of  competition"  is  elaborately  defined  in  section  5  of 
the  Federal  Trade  Commission  Act.  Briefly,  it  consists  of  the 
following  steps : 

(1)  If  "the  Commission  shall  have  reason  to  believe  that  any 
.  .  .  person,  partnership,  or  corporation  has  been  or  is  using 
any  unfair  method  of  competition,"  and  "if  it  shall  appear  to 
the  Commission  that  a  proceeding  by  it  in  respect  thereof 
would  be  to  the  interest  of  the  public,"  it  serves  a  complaint 
upon  the  defendant,  giving  30  days  notice  of  hearing. 

(2)  The  hearing  before  the  Commission  then  occurs;    any- 
one "upon  good  cause  shown"  may  intervene;  the  defendant 
may  show  cause  why  an  order  should  not  be  entered  against 
him ;  testimony  shall  be  reduced  to  writing  and  filed  with  the 
Commission. 

(3)  If  the  Commission  is  of  the  opinion  that  the  method  of 
competition  in  question  is  prohibited  by  the  Act,  the  Commis- 
sion shall  report  in  writing  its  findings  of  fact  and  shall  issue 
its  order  against  the  defendant.     If  the  Commission  is  of  the 
opinion  that  the  statute  is  not  being  violated,  the  Commission 
apparently  is  not  required  to  report  in  writing  its  findings  of 
facts  or  to  make  any  order  in  the  premises. 

(4)  If  the  Commission  deems  proper,  it  may  at  any  time 
before  the  transcript  of  record  is  filed  in  the  Circuit  Court  of 
Appeals,  as  provided  in  (5)  below,  modify  or  set  aside  in  whole 
or  in  part  such  report  or  order. 

(5)  If  the  defendant  fails  to  obey  the  order  against  him,  the 


THE   CLAYTON  ACT  321 

Commission  may  upon  filing  the  transcript  of  the  record  (in- 
cluding the  testimony,  report  and  order)  apply  to  the  Circuit 
Court  of  Appeals,  where  the  defendant  resides  or  carries  on 
business  or  violated  the  statute,  for  a  decree  enforcing  its 
order ;  the  jurisdiction  of  the  Circuit  Court  of  Appeals  is  exclu- 
sive, and  such  proceedings  shall  be  given  precedence  over  other 
cases;  the  court  shall  serve  upon  the  defendant  notice  of  the 
filing  of  such  application  and  transcript. 

(6)  If  the  defendant  desires  a  review  of  the  order  against 
him  he  may,  upon  filing  in  the  Circuit  Court  of  Appeals  a  peti- 
tion praying  that  the  order  be  set  aside,  obtain  a  review ;  the 
jurisdiction  of  the  Circuit  Court  of  Appeals  is  exclusive,  and 
such  proceedings  shall  be  given  precedence  over  other  cases; 
a  copy  of  the  petition  shall  be  served  on  the  Commission  which 
shall  certify  the  filing  of  the  transcript.     It  seems  that  if  the 
Commission  should  decide  in  favor  of  the  defendant,  and  re- 
port in  writing  its  findings  of  fact,  and  issue  its  order  to  the 
effect  that  the  statute  was  not  being  violated,  there  would  be 
no  method  for  reviewing  such  report  and  order. 

(7)  The  Circuit  Court  of  Appeals  shall  take  jurisdiction  of 
the  proceedings  and  of  the  questions  determined  therein;   the 
jurisdiction  of  the  Circuit  Court  of  Appeals  shall  be  exclusive, 
and  such  proceedings  shall  be  given  precedence  over  other 
cases ;  the  evidence  of  the  Commission  as  to  the  facts,  if  sup- 
ported by  testimony,  shall  be  conclusive. 

(8)  If  either  party  applies  in  the  Circuit  Court  of  Appeals 
for  leave  to  adduce  additional  evidence,  and  shall  satisfy  the 
court  that  it  is  material  and  that  there  were  reasonable  grounds 
for  failure  to  adduce  it  before  the  Commission,  the  court  hiay 
order  it  to  be  taken  before  the  Commission ;  and  the  Commis- 
sion may  modify  its  findings  as  to  the  facts,  and  may  make 
new  findings  by  reason  of  additional  evidence  so  taken,  and 
shall  return  such  additional  evidence  and  file  such  modified  or 
new  findings,  and  recommend  modifying  or  setting  aside  its 
original  order;   the  court  may  order  such  additional  evidence 


322  THE   FEDERAL   TRADE   COMMISSION 

to  be  adduced  upon  the  hearing  before  the  court  in  such  man- 
ner and  on  such  terms  as  the  court  deems  proper. 

(9)  The  Circuit  Court  of  Appeals  shall  have  power  to  make 
and  enter  upon  the  pleadings,  testimony  and  proceedings  set 
forth  in  such  transcript  a  decree  affirming,  modifying  or  setting 
aside  the  order  of  the  Commission. 

(10)  The  decree  of  the  Circuit  Court  of  Appeals  shall  be 
final,  excepting  that  it  may  be  reversed  by  the  Supreme  Court 
upon  certiorari  and  that  it  shall  not  in  any  wise  relieve  or 
absolve  any   person  from  any  liability  under   the   antitrust 
acts.     No  order  of  the  Commission  or  board  or  the  judgment 
of  the  court  to  enforce  the  same  shall  in  any  wise  relieve  or 
absolve  any  person  from  any  liability   under  the   antitrust 
acts. 

The  first  proceeding  by  the  Commission  under  the  act  is 
now  pending  in  the  first  stage  above  described. 

The  procedure  of  the  Commission,  in  respect  of  violations  of 
the  Clayton  Act,  is  substantially  the  same  as  that  regarding 
"unfair  methods  of  competition";  excepting  that  the  require- 
ment, in  the  first  stage  of  the  latter  procedure,  that  "it  shall 
appear  to  the  Commission  that  a  proceeding  by  it  in  respect 
thereof  would  be  to  the  interest  of  the  public"  is  significantly 
omitted. 

Since  "unfair  methods  of  competition"  have  not  yet  been 
defined  by  the  courts,  and  since  the  Senate  has  proved  so  hope- 
lessly divided  upon  the  definition,  it  is  hardly  the  part  of  pru- 
dence to  venture  at  this  time  any  definition  whatsoever.  For 
the  purpose,  however,  of  correcting  what  is  believed  to  be  a 
serious  misconception,  likely  to  be  fostered  by  the  first  proceed- 
ing already  begun  by  the  Commission,  the  following  observations 
are  summarily  stated : 

"Unfair  methods  of  competition"  are  those  methods  of 
competition  that  already  are  forbidden  by  the  Sherman  Act. 
They  are  the  methods  of  business  competition  denounced  in  a 
long  line  of  Supreme  Court  and  federal  court  decisions,  and  in 


THE   CLAYTON   ACT  323 

a  number  of  decrees  in  Government  suits  under  the  Sherman 
Act.1  In  this  connection,  it  is  fair  to  add  that  these  precedents 
show  many  more  methods  of  business  competition  to  be  for- 
bidden by  the  Sherman  Act  than  were  generally  supposed,  in 
Congress  or  outside,  when  the  Federal  Trade  Commission  Act 
was  passed. 

"Passing  off"  one's  goods  or  business  for  another's,  mis- 
branding,  and  similar  acts  which,  in  Justice  Holmes'  phrase  in 
Nash  v.  United  States  2  are  "  no  more  than  .  .  .  small  dishon- 
esties of  trade  "  and  "  small  local  offenses"  that  cannot  be  said 
to  "prejudice  the  public  interests  by  unduly  restricting  competi- 

1  See  Standard  Oil  Co.  v.  United  States,  221  U.  S.  43  ;  1911.  United  States  v. 
American  Tobacco  Co.,  221  U.  S.  106,  179;  1911.  Central  Lumber  Co.  v.  South 
Dakota,  226  U.  S.  157 ;  1913.  United  States  v.  American  Naval  Stores  Co.,  172 
Fed.  455,  459 ;  1909.  Ware-Kramer  Tobacco  Co.  v.  American  Tobacco  Co.,  180 
Fed.  160;  1901.  United  States  v.  Keystone  Watch  Case  Company,  218  Fed.  502, 
515 ;  1915.  Buckeye  Powder  Company  v.  E.  I.  du  Pont  de  Nemours  Powder  Co., 
D.  C.  N.  J.,  February  25,  1914,  Judge  Rellstab's  charge  of  the  jury,  not  re- 
ported, affirmed  in  223  Fed.  881 ;  1915.  See  also  the  decree  in  United  States  v. 
Central  West  Publishing  Company,  D.  C.  N.  D.  111.,  August  3,  1912,  in  which 
"unfair  competition"  was  enjoined,  and  the  decree  in  United  States  v.  General 
Electric  Co.,  N.  D.  Ohio,  October  12,  1911,  in  which  "fair  competition"  was 
mentioned,  and  the  decrees  in  the  following  cases  in  which  neither  "unfair" 
nor  "fair"  competition  was  mentioned,  but  certain  specified  methods  of  com- 
petition were  particularly  enjoined  ;  United  States  v.  Aluminum  Co.  of  America, 
D.  C.  W.  D.  Pa.,  June  7,  1912.  United  States  v.  American  Coal  Products  Co., 
D.  S.  S.  D.  N.  Y.,  March  4,  1913.  Besides  these  might  be  cited  the  decrees 
in  United  States  v.  Nome  Retail  Grocers'  Association,  D.  C.  Alaska,  November  5, 
1905.  United  States  v.  National  Association  of  Retail  Druggists,  C.  C.  Ind., 
May  9,  1907.  United  States  v.  Southern  Wholesale  Grocers1  Association,  C.  C. 
N.  D.  Alabama,  October  17,  1911.  United  States  v.  Standard  Sanitary  Manu- 
facturing Co.,  C.  C.  Md.,  November  25,  1911.  United  States  v.  Standard  Wood 
Co.,  C.  C.  S.  D.  N.  Y.,  March  11,  1912.  United  States  v.  Pacific  Coast  Plumb- 
ing Supply  Association,  C.  C.  S.  D.  Cal.,  January  6,  1912.  United  States  v. 
Philadelphia  Jobbing  Confectioners'  Association,  E.  D.  Pa.,  February  17,  1913. 
United  States  v.  Burroughs  Adding  Machine  Co.,  D.  C.  Mich.,  March  3,  1913. 
United  States  v.  New  Departure  Manufacturing  Co.,  D.  C.  W.  D.  N.  Y.,  May 
27,  1913.  United  States  v.  Elgin  Board  of  Trade,  D.  C.  N.  D.  111.,  April  27, 1914. 
United  States  v.  National  Wholesale  Jewellers  Association,  D.  C.  S.  D.  N.  Y., 
June  30,  1914.  United  States  v.  Eastern  States  Lumber  Dealers  Association, 

C.  C.  S.  D.  N.  Y.,   March  1,   1913,  affirmed  234  U.  S.  600;    1914.    United 
States  v.  Hamburg-Amerikanische  Packetfahrt  Actien-Gesettschaft,  and  others, 

D.  C.  S.  D.  N.  Y.,  October  13,  1914,  216  Fed.  971,  1915,  but  reversed  because 
now  moot  in  consequence  of  the  European  War,  239  U.  S.  466 ;  1914. 

*  229  U.  S.  373,  376,  378 ;  1913. 


324  THE   FEDERAL   TRADE   COMMISSION 

tion  or  unduly  obstructing  the  course  of  trade1"  are  not,  it  is 
submitted,  "unfair  methods  of  competition"  punishable  under 
the  Federal  Trade  Commission  Act.  Support  for  this  view  is 
supplied  by  the  subsequent  provision  in  the  same  section, 
which  requires  that  "it  shall  appear  to  the  Commission  that  a 
proceeding  by  it  in  respect  thereof  would  be  to  the  interest  of 
the  public."  This  seems,  indeed,  to  incorporate  the  very  test 
that  Judge  Holmes  expressed  in  the  passage  above  quoted. 

Support  for  this  view  is  also  found  in  the  essential  character 
of  the  Commission.  It  is  not,  and  cannot  be,  a  judicial  body. 
Since  the  Commission  must  always  be  the  complainant  in  all 
proceedings  before  it,  and  the  Federal  Trade  Commission  Act, 
unlike  the  Interstate  Commerce  Commission  Act,  provides  for 
no  such  party  as  a  private  complainant,  the  Federal  Trade 
Commission  seems  lacking  in  at  least  one  quasi- judicial  func- 
tion possessed  by  the  Interstate  Commerce  Commission.  The 
Federal  Trade  Commission  is  an  administrative  body,  charged 
with  public  duties,  with  only  such  quasi-judicial  functions  as 
the  Act  confers  for  the  more  perfect  administration  of  its 
public  duties. 

These  considerations,  independent  of  the  unlikelihood  that 
Congress  had  any  intention  of  paralleling  the  federal  and  state 
courts  with  another  tribunal  for  the  adjustment  of  personal 
controversies,  or  of  smothering  under  this  avalanche  of  private 
trade  disputes  a  Commission  charged  with  so  many  well- 
defined  and  highly  important  duties,  seem  clearly  to  support 
the  interpretation  above  suggested. 

The  reports  which  the  Commission  has  published,  the  con- 
ference rulings  it  has  announced,  and  the  proceedings  it  has 
commenced,  are  only  a  fraction  of  the  work  it  has  already 
accomplished. 

Hundreds  of  petitions  for  the  issuance  of  complaints  have 
been  and  are  being  handled  by  the  Commission.  Under  a 

Citing  Standard  Oil  Company  v.  United  States,  221  U.  S.  1,  42;  1911. 
United  States  v.  American  Tobacco  Company,  221  U.  S.  106,  179;  1911. 


THE  CLAYTON  ACT  325 

policy  of  notifying  the  party  complained  of  before  any  pro- 
ceedings under  the  Act  are  begun  or  even  determined  upon  by 
the  Commission,  and  of  affording  the  party  complained  of 
opportunity  to  explain  matters  before  these  steps  are  taken, 
scores  of  matters  have  been  and  are  being  adjusted  without 
the  necessity  of  any  formal  proceedings. 

By  an  arrangement  with  the  Attorney  General,  complaints 
lodged  with  the  Department  of  Justice,  regarding  matters 
already  under  investigation  by  the  Commission,  are  now  being 
turned  over  to  the  Commission  for  action. 

Whether  the  Commission  will,  or  legally  can,  undertake  to 
consider  the  legality  of  business  projects  submitted  to  it  in 
advance  of  their  consummation,  is  not  and  probably  will  not 
be  settled  for  some  time  to  come.  Several  conference  rulings, 
that  the  Commission  already  has  made,  seem  to  point  in  this 
direction.  The  legal  and  practical  arguments  against  such 
practice,  however,  are  very  formidable.  No  authority  to  en- 
force or  even  interpret  the  Sherman  Act  appears  to  be  vested 
in  the  Commission.  Without  this  jurisdiction,  the  Commis- 
sion is,  and  will  be,  helpless  to  rule,  either  before  or  after  the 
event,  upon  questions  of  organization  and  combination,  aris- 
ing under  the  Sherman  Act. 

Nevertheless,  a  great  area,  once  under  the  Sherman  Act, 
and  now  included  under  the  "unfair  methods  of  competition" 
section  of  the  Federal  Trade  Commission  Act,  and  the  "price 
discrimination"  and  "exclusive  contract"  section  of  the  Clay- 
ton Act,  has  come  under  the  jurisdiction  of  the  Commission. 
To  this  has  also  been  added  the  unexplored  field  defined  by  the 
"intercorporate  stockholding"  and  "interlocking  directorship" 
sections  of  the  Clayton  Act. 

Wise  exercise  of  the  Commission's  powers  and  sound  choice 
of  its  policy  ought  eventually  to  lead  to  its  being  permitted  to 
take  over  from  the  Attorney  General  a  troublesome  variety  of 
antitrust  cases  that  now  threaten  to  swamp  the  Department 
of  Justice;  and,  even  more  auspiciously,  to  the  Commission's 


326  THE   FEDERAL   TRADE   COMMISSION 

making  to  Congress  recommendations  ripened  by  full  study 
and  a  wealth  of  experience  for  the  correction  of  legislative  mis- 
takes and  omissions  regarding  our  domestic,  and  more  par- 
ticularly our  foreign  commerce,  by  which  governmental  prac- 
tice and  commercial  efficiency  may  at  last  be  brought  into  a 
degree  of  harmony  to  which  both  have  heretofore  been  un- 
happily strangers. 


THE  PUBLIC  SERVICE  COMMISSIONS 

A  Lecture  Delivered  before  the  Association  of  the  Bar  of  the  City  of  New  York 
by  George  S.  Coleman,  March  29,  1916 

THE  Committee  on  Lectures  have  suggested  that  I  confine 
myself  to  a  statement  of  the  origin  of  the  Public  Service  Com- 
missions Law  of  New  York,  its  general  provisions,  the  organi- 
zation of  the  Commissions  and  the  method  of  work  under  the 
Law,  with  perhaps  a  reference  to  some  decisions  of  the  courts 
that  have  clarified  the  legislative  intent. 

The  germ  of  this  law  may  be  found  in  the  first  inaugural 
address  of  Governor  Hughes,  January  1,  1907.  His  early  state- 
ments are  like  the  overture  of  an  opera,  in  that  the  law  as  passed 
and  now  in  effect  carries  out  in  detail  the  suggestions  of  the 
inaugural  and  earliest  messages.  The  following  paragraph 
from  the  inaugural  is  significant : 

It  must  freely  be  recognized  that  many  of  the  evils  of  which  we 
complain  have  their  source  in  the  law  itself,  in  privileges  carelessly 
granted,  in  opportunities  for  private  aggrandizement  at  the  expense 
of  the  people  recklessly  created,  in  failure  to  safeguard  our  public 
interests  by  providing  means  for  just  regulation  of  those  enterprises 
which  depend  upon  the  use  of  public  franchises.  Wherever  the  law 
gives  unjust  advantage,  wherever  it  fails  by  suitable  prohibition  or 
regulation  to  protect  the  interests  of  the  people,  wherever  the  power 
derived  from  the  State  is  turned  against  the  State,  there  is  not  only 
room,  but  urgent  necessity  for  the  assertion  of  the  authority  of  the 
State  to  enforce  the  common  right. 

In  his  first  message  to  the  Legislature,  on  January  2,  the 
Governor  referred  to  various  matters  of  importance  but  gave 
the  greatest  prominence  to  the  subject  of  Public  Service  Cor- 
porations. The  following  extracts  will  perhaps  best  indicate 
what  he  had  in  mind : 

327 


328  PUBLIC   SERVICE   COMMISSIONS 

Proper  means  for  the  regulation  of  the  operation  of  railroad  cor- 
porations should  be  supplied.  For  want  of  it,  pernicious  favoritism 
has  been  practiced.  Secret  rebates  have  been  allowed,  and  there  have 
been  unjust  discriminations  in  rates  and  in  furnishing  facilities  for 
transportation.  Those  who  have  sought  to  monopolize  trade  have 
thus  been  enabled  to  crush  competition  and  to  grow  in  wealth  and 
power  by  crowding  out  their  rivals  who  have  been  deprived  of  access 
to  markets  upon  equal  terms.  These  abuses  are  not  to  be  tolerated. 
Congress  has  legislated  upon  the  subject  with  reference  to  interstate 
commerce,  where  naturally  the  evil  has  been  most  prominent.  But 
domestic  commerce  must  be  regulated  by  the  State,  and  the  State 
should  exercise  its  power  to  secure  impartial  treatment  to  shippers 
and  the  maintenance  of  reasonable  rates.  There  is  also  need  of  regu- 
lation and  strict  supervision  to  insure  adequate  service  and  due  regard 
for  the  convenience  and  safety  of  the  public.  The  most  practicable 
way  of  attaining  these  ends  is  for  the  Legislature  to  confer  proper 
power  upon  a  subordinate  administrative  body. 

The  present  scheme  of  regulation  is  inadequate.  There  is  a  lack 
of  precision  in  the  definition  of  the  powers  of  the  board  and  an  absence 
of  suitable  means  to  compel  compliance  with  its  decisions.  No  penal- 
ties are  provided  for  disobedience  to  orders  of  the  board  made  within 
its  proper  authority.  Nor  is  the  board  authorized  to  institute  and 
conduct  legal  proceedings  for  the  purpose  of  enforcing  its  requirements. 

I,  therefore,  recommend  that  the  present  Board  of  Railroad  Com- 
missioners and  the  Commission  of  Gas  and  Electricity  be  abolished 
and  that  a  new  commission  be  constituted,  with  powers  of  regulation 
and  supervision,  within  constitutional  limits,  of  the  corporations  now 
subject  to  the  existing  commissions.  The  commission  should  have 
all  the  powers  possessed  by  the  present  commissions  and  such  additional 
powers  as  may  be  needed  to  insure  proper  management  and  operation. 
Its  powers  should  be  clearly  defined  and  should  embrace  the  power 
to  act  upon  its  own  initiative  as  well  as  upon  complaint;  to  pass 
upon  the  issue  of  stocks  and  bonds;  to  examine  properties,  books, 
and  accounts ;  to  require  detailed  reports  in  prescribed  form ;  to  pre- 
scribe reasonable  rates;  to  require  adequate  and  impartial  service; 
to  provide  for  the  safety  of  employees  and  for  the  protection  of  the 
public ;  and  generally  to  direct  whatever  may  be  necessary  or  proper 
to  safeguard  the  public  interests  and  to  secure  the  fulfillment  of  the 
public  obligations  of  the  corporations  under  its  supervision.  Provision 
should  be  made  for  suitable  inspection  so  that  the  commission  may 
be  advised  as  to  all  matters  within  its  purview  and  be  in  a  position 


PUBLIC   SERVICE   COMMISSIONS  329 

to  take  action  on  behalf  of  the  people  without  the  formal  institution 
of  proceedings  by  complainants.  A  prescribed  quorum  should  be 
entitled  to  decide  all  questions,  and  any  one  commissioner  should 
be  empowered  to  make  examinations  and  investigations,  and  the  pro- 
ceedings and  decisions  of  one,  when  approved  by  the  board,  should 
stand  as  its  proceedings  and  decisions. 

The  corporation  guilty  of  disobedience  to  its  orders,  and  all  officers 
and  other  persons  responsible  for  such  disobedience  should  be  visited 
with  appropriate  penalties.  The  commission  should  also  be  entitled 
to  institute  legal  proceedings  for  the  enforcement  of  its  orders  and 
all  such  proceedings  should  be  expedited  by  suitable  preference  in  all 
the  courts  of  the  State.  The  Legislature  should  thus  provide,  within 
its  constitutional  power,  adequate  means  for  the  entirely  just  and 
impartial  regulation  of  these  important  public  enterprises. 

After  making  special  reference  to  conditions  in  Greater  New 
York  and  clearly  stating  his  reasons  for  thinking  that  there 
should  be  one  commission  for  that  city  and  a  separate  com- 
mission for  the  rest  of  the  State,  he  closed  the  subject  with  this 
recommendation : 

I  recommend  that  the  Board  of  Rapid  Transit  Commissioners  be 
abolished  and  that  a  new  board  be  created,  to  have  all  the  powers  now 
exercised  by  the  Rapid  Transit  Board,  and  also  to  have  powers  with 
reference  to  operations  within  the  territory  of  Greater  New  York,  — 
or  if  deemed  advisable,  within  a  wider  district  embracing  the  adjoin- 
ing counties  into  which  certain  lines  of  the  surface  railroads  extend, 
—  similar  to  the  powers  which  I  have  suggested  should  be  conferred 
upon  the  new  commission  for  the  rest  of  the  State.  There  would 
thus  be  included  the  regulation  of  gas  and  electric  corporations.  Pro- 
vision should  be  made  for  the  retention  by  the  board  of  estimate  and 
apportionment  of  the  city,  of  all  the  powers,  including  powers  of 
approval,  which  it  now  enjoys.  The  commission  proposed  for  the 
State  generally  should  have  jurisdiction  over  all  traffic  between  points 
within  the  city  of  New  York  and  points  elsewhere  in  the  State.  It  is 
believed  that  in  this  manner  the  whole  question  of  transportation, 
and  of  gas  and  electric  service,  in  the  territory  of  Greater  New  York 
can  be  dealt  with  in  an  intelligent  and  efficient  manner,  and  that  to 
the  fullest  extent  possible  the  just  requirements  of  that  great  com- 
munity may  be  satisfied. 


330  PUBLIC   SERVICE   COMMISSIONS 

The  first  emergency  message  of  Governor  Hughes  to  the 
Legislature  in  1907  related  to  Senate  Bill  No.  1738,  entitled 
"An  Act  to  establish  the  public  service  commissions  and  pre- 
scribing their  powers  and  duties,  and  to  provide  for  the  regu- 
lation and  control  of  certain  public  service  corporations  and 
making  an  appropriation  therefor." 

Every  Governor  from  Cleveland  down  had  at  one  time  or 
another  suggested  some  form  of  control  and  regulation  of 
public  service  corporations  by  state  officials,  but  it  remained  for 
Governor  Hughes  to  have  the  idea  put  in  systematic  form  and 
made  effective.  As  you  read  the  Public  Service  Commissions 
Law  of  1907  you  find  that  every  important  suggestion  of  the 
first  message  is  crystallized  in  the  statute. 

Instead  of  being  purely  advisory  the  work  of  the  Commis- 
sion is  directory,  and  the  law  has  sharp  teeth.  If  the  facts 
warrant,  the  parties  who  fail  to  obey  either  the  law  or  the 
orders  of  the  Commission  may  be  suitably  punished  in  civil  or 
criminal  proceedings.  You  will  find  provisions  to  overcome 
the  defects  of  the  railroad  law  of  years  ago,  when  favoritism 
was  disclosed,  when  different  rates  were  allotted  to  the  same 
classes  of  shippers,  when  rebates  were  permitted  to  some  and 
denied  to  others  —  abuses  that  gave  rise  to  the  Granger  Cases 
and  led  ultimately,  as  you  know,  to  the  Interstate  Commerce 
Law.  But  even  the  Interstate  Commerce  Law  did  not  con- 
tain the  provisions  of  the  Public  Service  Commissions  Law 
which  give  power  to  the  Commissions,  through  the  properly 
constituted  authorities,  to  enforce  their  lawful  orders. 

General  Provisions 

It  is  hardly  necessary,  nor  does  it  seem  desirable,  on  this 
occasion  to  discuss  in  detail  the  provisions  of  the  Public  Service 
Commissions  Law.  Those  who  have  occasion  to  refer  to  it 
will  find  the  provisions  embodied  in  a  single  statute,  with 
amendments,  and  they  will  discover  that  although  relating  to 


PUBLIC   SERVICE   COMMISSIONS  331 

different  classes  of  corporations  somewhat  similar  provisions 
are  found  with  respect  to  each  particular  kind  of  service. 

The  Law  was  originally  enacted  in  1907.  It  applied  to  rail- 
roads, street  railroads  and  common  carriers,  gas  and  electric 
corporations.  By  the  general  revision  of  1910  a  new  article 
was  added  relating  to  telegraph  and  telephone  corporations  and 
in  1913  a  further  article  was  enacted  relating  to  steam  corpora- 
tions. By  the  original  act  of  1907  the  former  board  of  railroad 
commissioners,  the  commission  of  gas  and  electricity  and  the 
board  of  rapid  transit  railroad  commissioners  were  abolished 
and  the  powers  and  duties  of  such  boards  were  conferred  and 
imposed  upon  the  Public  Service  Commission.  Also,  the  offices 
of  inspector  and  deputy  inspectors  of  gas  meters  were  abolished 
and  their  powers  and  duties  likewise  transferred. 

As  in  most  modern  legislation  of  this  character,  the  statute 
begins  with  definitions  of  the  various  important  words  and 
phrases  used  in  the  Law.  In  Article  I  the  territorial  limits  of 
the  two  districts  are  stated,  the  jurisdiction  of  the  respective 
Commissions  is  defined,  provisions  are  made  for  necessary 
officers,  clerks,  inspectors,  experts  and  employees,  for  meetings 
of  the  Commissions,  payment  of  salaries  and  expenses,  reports 
of  Commissions,  attendance  of  witnesses  and  practice  before 
the  Commissions,  court  proceedings,  service  and  effect  of  orders 
and  actions  to  recover  penalties  or  forfeitures. 

In  Article  II  are  found  provisions  relating  to  railroads,  street 
railroads  and  common  carriers,  their  service  and  charges,  switch 
and  side-track  connections,  publication  of  tariff  schedules,  con- 
tracts, agreements  or  arrangements  between  carriers,  unjust 
discrimination,  unreasonable  preference,  transportation,  rates 
and  passes,  false  billing  by  carrier  or  shipper  and  similar  pro- 
visions. 

Article  III  contains  provisions  relating  to  the  powers  of  the 
Commissions  in  respect  to  common  carriers,  railroads  and  street 
railroads;  the  duty  of  such  corporations  to  make  and  file 
periodical  reports;  investigation  of  accidents;  the  fixing  of 


332  PUBLIC   SERVICE   COMMISSIONS 

rates  and  service;  power  of  Commissions  to  order  necessary 
repairs  or  changes  in  tracks,  switches,  terminals,  etc.,  and  the 
power  of  the  Commissions  to  order  changes  in  schedules  for  the 
running  of  cars  and  trains;  establishment  of  uniform  system 
of  accounts  and  the  right  of  access  to  accounts;  necessity  of 
securing  permission  and  approval  for  exercising  of  franchises 
and  privileges,  for  transfer  of  franchises  or  stocks,  for  the  issue 
of  stocks,  bonds  and  other  forms  of  indebtedness ;  supervision 
and  authorization  of  reorganizations ;  and  forfeitures  or  penal- 
ties for  violations  of  the  Law  or  failure  to  comply  with  orders  of 
the  Commission. 

Article  IV  contains  appropriate  provisions  with  respect  to 
gas  and  electrical  corporations  and  the  regulation  of  the  price 
and  quality  of  gas  and  electricity;  and  the  later  Articles  of 
1910  and  1913  contain  appropriate  provisions  to  carry  out  the 
same  general  purpose  for  the  control  of  telephone  and  telegraph 
corporations  and  steam  corporations. 

In  connection  with  the  provisions  of  the  Public  Service 
Commissions  Law  must  be  considered  the  provisions  of  the 
Railroad  Law,  the  Transportation  Corporations  Law  and  the 
Stock  Corporation  Law. 

Speaking  generally  and  considering  the  Law  as  a  whole,  the 
declared  object  of  the  Legislature  was  to  secure,  in  every  in- 
stance, safe  and  adequate  service,  just  and  reasonable  rates, 
SAFE  AND  ADEQUATE  SERVICE,  JUST  AND  REASONABLE  RATES  ; 
and  the  whole  endeavor,  apparently,  of  the  State  is  to  har- 
monize those  two  things.  But  often  it  is  difficult  to  apply  the 
principle  satisfactorily  and  to  determine  in  a  given  case  what  is 
safe  and  adequate  service  and  what  are  just  and  reasonable 
charges.  Perhaps  no  two  cases  are  exactly  alike  and  there  is 
room  for  the  ingenuity  of  man  to  present  obstacles  as  serious 
and  as  hard  to  get  over  as  the  pitfalls  and  barbed  wire  entangle- 
ments of  modern  defensive  warfare.  If  any  difficulty  en- 
countered is  due  to  a  defect  in  the  statute,  the  remedy  of  the 
people  through  the  Commission  is  to  secure  an  amendment  of 


PUBLIC   SERVICE   COMMISSIONS  333 

the  statute.  If  there  is  a  fundamental  defect  in  the  Law,  it 
may  require  even  a  constitutional  amendment.  In  a  proper 
case  it  is  believed  that  the  people  of  the  State  will  not  hesitate 
to  grant  the  necessary  powers  to  carry  out  the  legitimate 
objects  of  their  legislation. 

It  may  be  noted  that  while  the  work  of  the  Commissions  is 
divided  generally  by  territorial  lines  (the  Commission  for  the 
First  District  attending  to  matters  in  the  counties  constitut- 
ing Greater  New  York  and  the  Commission  for  the  Second 
District  attending  to  matters  in  the  rest  of  the  State),  the 
regulation  of  telegraph  and  telephone  corporations  is  com- 
mitted exclusively  to  the  Commission  for  the  Second  District, 
while  the  powers  and  duties  arising  under  the  Rapid  Transit 
Act  are  exercised  and  performed  exclusively  by  the  Commis- 
sion for  the  First  District.  And  in  cases  where  it  appears 
to  both  Commissions  that  separate  jurisdiction  has  not  been 
conferred  "a  joint  hearing  shall  be  fixed  and  had  by  members 
of  both  commissions,  and  the  determination  shall  be  by  joint 
order,  which  shall  be  effective  when  concurred  in  by  not  less 
than  three  members  of  each  commission."  (§  49,  5.) 

The  Rapid  Transit  Act  (Laws  of  1891,  Chapter  4),  "AN  ACT 
to  provide  for  rapid  transit  railways  in  cities  of  over  one  mil- 
lion inhabitants,"  as  amended  to  date,  while  in  form  a  general 
statute,  affects  now  only  the  City  of  New  York.  It  is  designed 
to  secure  for  the  people  of  the  City  the  necessary  extension  and 
improvement  of  intra-urban  railroad  service  at  a  low  and  uni- 
form fare.  It  is  the  province  of  the  Commission  to  determine 
the  necessity  for  new  routes  or  lines  and  to  initiate  the  neces- 
sary proceedings,  prepare  plans,  contracts  and  specifications 
for  construction,  equipment  and  operation  and  to  supervise 
generally  and  in  detail  the  work  of  such  construction.  In  a 
work  of  such  magnitude,  involving  under  present  plans  an 
investment  by  the  City  and  by  private  railroad  corporations  of 
over  three  hundred  million  dollars,  it  is  essential  that  while 
the  initiative  under  the  law  belongs  to  the  Commission  the 


334  PUBLIC  SERVICE   COMMISSIONS 

approval  of  the  local  authorities  should  be  secured  before  a 
new  route  or  line  is  established  or  public  money  committed 
to  the  enterprise.  Under  constitutional  provisions  it  also  is 
necessary  to  secure  the  consents  of  abutting  property  owners, 
or  in  lieu  thereof  the  consent  of  the  courts,  before  a  new  route 
can  be  legalized. 

It  may  be  remembered  that  when  the  Public  Service  Com- 
missions Law  was  proposed  it  did  not  have  the  approval  of  the 
local  authorities  of  the  City  of  New  York.  It  also  may  be 
remembered  that  after  its  enactment  the  validity  of  the  Law 
was  assailed  in  the  courts,  and  that  it  was  not  found  convenient 
to  secure  money  for  rapid  transit  development  because  a  ques- 
tion had  been  raised  as  to  the  City's  borrowing  capacity  under 
the  provisions  of  the  State  Constitution.  It  took  years  to  have 
these  matters  judicially  determined ;  and  while  the  demand  for 
increased  transit  facilities  became  urgent  and  insistent  there 
was  not  money  enough  to  enable  the  City  to  carry  out  its  part 
of  the  program  until  not  only  additional  legislation  had  been 
secured  but  also  an  amendment  to  §  10  of  Article  VIII  of  the 
Constitution  providing  that  certain  rapid  transit  bonds  might 
be  excluded  in  estimating  the  City's  indebtedness.  When 
these  adverse  conditions  were  finally  overcome,  one  great  object 
of  the  Commission  was  achieved  by  the  ratification  in  March, 
1913,  of  what  are  commonly  known  as  the  Dual  System  Con- 
tracts for  the  construction  and  operation  of  the  entire  rapid 
transit  system  of  Greater  New  York.  The  work  is  proceed- 
ing rapidly  toward  completion.  When  entirely  completed  the 
effect  will  be  to  treble  and  in  some  places  to  quintuple  existing 
service.  In  spite  of  all  that  may  be  said  as  to  the  wisdom  or 
unwisdom  of  the  contracts,  if  at  the  end  of  the  period  provided 
for  in  the  operating  agreements  the  City  takes  over,  without 
further  obligation,  the  roads  into  which  so  many  millions  of 
dollars  of  private  capital  have  gone,  it  will  not  have  spent  its 
money  in  vain.  Of  course,  when  the  contracts  were  made,  it 
was  anticipated  that  in  the  course  of  time  the  City  would 


PUBLIC   SERVICE   COMMISSIONS  335 

receive  not  only  what  it  contributed  but  interest  on  the  invest- 
ment and  a  share  of  the  profits.  But  in  any  event  the  com- 
pletion of  the  stupendous  undertaking  will  have  added  enor- 
mously to  the  values  of  real  estate  and  will  greatly  enhance 
the  comfort  and  convenience  of  our  teeming  population. 

Organization  of  Commission 

To  carry  out  the  purpose  of  the  Law  the  Public  Service 
Commission  for  the  First  District  has  been  obliged  to  organize 
and  maintain  a  large  and  diversified  staff.  The  duties  imposed 
by  statute  upon  the  five  commissioners  appointed  by  the  Gov- 
ernor would,  of  course,  be  impossible  of  performance  without 
the  aid  of  numerous  and  efficient  assistants  and  employees. 
Section  8  of  the  Law  provides : 

Each  commission  shall  have  power  to  employ,  during  its  pleasure, 
such  officers,  clerks,  inspectors,  experts  and  employees  as  it  may  deem 
necessary  to  carry  out  the  provisions  of  this  chapter,  or  to  perform 
the  duties  and  exercise  the  powers  conferred  by  law  upon  the  com- 
mission. 

Under  this  authority  the  organization  of  the  Commission  for 
the  First  District  has  grown  to  include 

1.  Commissioners  and  staff. 

2.  General  administration. 

3.  Legal  Department. 

4.  Bureau  of  Transit  Inspection. 

5.  Bureau  of  Gas  and  Electricity. 

6.  Bureau  of  Statistics  and  Accounts. 

7.  Bureau  of  Electrical  Equipment  and  Inspection. 

8.  Engineering  Department. 

On  January  1,  1915,  the  number  of  Commissioners  and 
members  of  the  various  staffs  amounted  to  2107,  and  the  pay- 
roll aggregated  $2,909,873.  The  salaries  of  the  Commissioners, 
Counsel  and  Secretary  —  aggregating  $91,000  —  were  payable 
by  the  State ;  the  balance  by  the  City  of  New  York.  At  the 


336  PUBLIC   SERVICE   COMMISSIONS 

present  time  I  am  informed  that  the  number  now  embraced  in 
the  organization  is  about  2,300,  mainly  due  to  increased  work 
of  the  Engineering  Department  on  account  of  rapid  transit 
construction.  As  that  progresses  to  completion  the  various 
staffs  will  doubtless  rapidly  decrease  in  numbers  until  perhaps 
three  hundred  persons  will  be  able  to  handle  the  regular  work 
of  the  Commission.  If  even  that  number  should  seem  exces- 
sive, a  careful  reading  of  the  provisions  of  the  Law  relating  to 
the  powers  and  duties  of  the  Commissions  in  relation  to  com- 
mon carriers,  railroads,  gas  and  electric  corporations  and  steam 
corporations  would  probably  satisfy  you  that  the  estimate  was 
moderate.  Take  for  example  the  following  from  §  45,  sub- 
division 2 : 

Each  commission  shall  have  the  general  supervision  of  all  common 
carriers,  railroads,  street  railroads,  railroad  corporations  and  street 
railroad  corporations  within  its  jurisdiction  as  hereinbefore  denned, 
and  shall  have  power  to  and  shall  examine  the  same  and  keep  in- 
formed as  to  their  general  condition,  their  capitalization,  their  fran- 
chises and  the  manner  in  which  their  lines  and  property,  owned, 
leased,  controlled  or  operated,  are  managed,  conducted  and  operated, 
not  only  with  respect  to  the  adequacy,  security  and  accommodation 
afforded  by  their  service,  but  also  with  respect  to  their  compliance 
with  all  provisions  of  law,  orders  of  the  commission  and  charter  re- 
quirements. Each  commission  shall  have  power,  either  through  its 
members  or  responsible  engineers  or  inspectors  duly  authorized  by  it, 
to  enter  in  or  upon  and  to  inspect  the  property,  equipment,  buildings, 
plants,  factories,  power-houses  and  offices  of  any  of  such  corporations 
or  persons.  .  .  . 

Consider,  also,  the  work  involved  in  connection  with  the 
annual  and  other  reports  of  corporations  under  §  46 ;  with  in- 
vestigation of  accidents  under  §  47 ;  with  investigations  of 
complaints  under  §  48 ;  with  rates  and  service  under  §§  49, 
50  and  51 ;  with  corporate  accounts  under  §  52,  franchises  and 
privileges  under  §  53,  transfer  of  franchises  and  stocks  under 
§  54,  approval  of  issues  of  stock,  bonds  and  other  forms  of 
indebtedness  under  §  55,  with  reorganizations  under  §  55a, 


PUBLIC   SERVICE   COMMISSIONS  337 

and  with  forfeitures  and  penalties  and  summary  proceedings 
under  §§  56-58.  Then  consider  similar  work  arising  with  re- 
spect to  gas  and  electric  corporations  and  steam  corporations. 
Consider,  also,  the  number  of  the  various  corporations  under 
the  jurisdiction  of  the  Commission,  their  capitalization,  the 
extent  and  complexity  of  their  business,  and  the  multitude  of 
people  daily  and  hourly  affected  by  their  operation.  The  re- 
sponsibility for  the  proper  supervision  and  regulation  of  these 
corporations  in  affairs  so  vast  and  so  important  to  the  welfare, 
comfort  and  convenience  of  the  people  and  to  the  interests  of 
the  corporations  themselves,  demands  at  all  times  a  sufficient 
and  capable  staff. 

Method  of  Work 

All  matters  for  the  Commission  go  first  to  the  administration 
department  and  are  there  duly  assigned.  If  a  complaint  is 
sent  to  the  legal  department  for  attention,  it  is  usually  taken 
up  with  the  department  or  bureau  having  general  charge  of  the 
subject-matter.  If  a  public  hearing  is  deemed  necessary,  the 
matter  is  put  upon  the  calendar  and  set  down  for  a  day  cer- 
tain and  the  parties  are  notified.  There  are,  of  course,  thou- 
sands of  complaints  that  never  reach  the  form  of  an  order,  or 
even  of  a  public  hearing,  but  are  disposed  of  by  correspondence 
or  by  informal  conference.  Many  hundreds  of  hearings,  how- 
ever, have  been  formally  held  and  have  resulted  in  formal  orders. 
Some  cases  have  taken  an  hour,  some  half  a  day,  some  have 
consumed  weeks  or  months  or  even  years,  before  the  hearings 
were  concluded  and  the  matter  disposed  of.  Rate  cases  are 
particularly  liable  to  be  protracted.  They  usually  involve  the 
investigation  of  ancient  and  voluminous  records  and  technical 
evidence  by  experts.  Since  the  rate  looks  to  the  future,  if  it 
is  urged  that  the  prices  of  labor  and  materials  are  advancing 
and  that  they  will  continue  to  advance,  the  facts  must  be  care- 
fully established  and  considered.  While  there  have  been  com- 
plaints of  delay  incident  to  rate  cases,  it  has  seemed  impossible 


338  PUBLIC   SERVICE   COMMISSIONS 

at  times  to  expedite  such  cases  and  yet  give  a  full  and  fair 
hearing  to  the  parties  concerned.  However,  speed  may  come 
with  experience.  If  some  bright  legal  mind  would  devise  a 
system  of  legal  logarithms,  some  simple  formula  whereby,  with 
certain  known  elements  in  any  given  case,  you  could  imme- 
diately indicate  the  just  and  reasonable  rate,  a  great  boon 
would  be  conferred  upon  every  modern  community.  Mean- 
time, an  amendment  of  the  Law  providing  for  rebate  covering 
the  period  of  controversy  in  case  of  eventual  reduction  would 
encourage  a  prompt  determination  of  the  issue. 

Where  the  question  presented  involves  a  proposed  issue  of 
stock  or  bonds,  it  usually  requires  the  attention  of  the  account- 
ants. Where  it  is  a  question  of  refunding  outstanding  obliga- 
tions, it  may  be  quite  impossible,  owing  to  lost  or  defective 
records,  to  prove  that  the  obligations  were  originally  issued 
for  a  capital  as  distinguished  from  an  operating  purpose;  and 
yet  the  fact  should  somehow  be  established.  Also  it  may  be 
disclosed  that  the  property  purchased  with  the  proceeds  of 
securities  concededly  issued  for  a  capital  purpose  has  become 
worn  out  or  destroyed  and  that  no  replacements  have  been 
made  nor  any  depreciation  fund  maintained.  If  in  such  case 
it  should  be  held  that  because  obligations  were  originally 
issued  for  a  capital  purpose  the  Commission  must  allow  new 
obligations  to  replace  them,  without  existing  property  to  rep- 
resent them,  it  might  seriously  interfere  with  the  apparent 
intent  of  the  legislature  as  indicated  in  §  55  of  the  Public  Serv- 
ice Commissions  Law  relating  to  railroads,  street  railroads 
and  common  carriers,  and  in  similar  provisions  relating  to  other 
corporations  under  the  jurisdiction  of  the  Commissions. 

Matters  affecting  travel  on  surface  or  other  railroads,  com- 
plaints as  to  transfers,  overcrowding,  shortage  of  cars,  lack  of 
facilities  and  other  matters  affecting  the  comfort  and  convenience 
of  the  public  are  handled  by  the  Bureau  of  Transit  Inspection. 
Questions  as  to  the  quality  of  gas  or  electricity,  including  the 
accuracy  of  meters,  are  referred  to  the  Bureau  of  Gas  and 


PUBLIC   SERVICE   COMMISSIONS  339 

Electricity;  and  where  the  safety  or  adequacy  of  electrical 
equipment  is  involved,  to  the  Bureau  organized  for  that  pur- 
pose. The  Engineering  Department,  as  its  name  suggests,  is 
concerned  with  matters  of  construction,  equipment  and  super- 
vision of  railroads,  power  houses,  tunnels,  bridges,  sewers,  and 
other  structures  connected  with  the  operation  of  companies 
subject  to  the  jurisdiction  of  the  Commission.  Its  principal 
work  during  the  years  since  1907  has  been  in  connection  with 
the  plans  and  construction  contracts  for  the  development  of 
rapid  transit,  and  it  also  has  supervised  the  important  work  of 
eliminating  dangerous  grade  crossings  under  the  Railroad  Law. 

The  work  accomplished  by  the  Commissions  in  both  dis- 
tricts is  set  forth  in  annual  reports,  in  records  of  proceedings 
and  in  volumes  of  opinions,  in  printed  and  permanent  form, 
accessible  to  public  inspection.  The  variety  and  practical  im- 
portance of  matters  arising  from  day  to  day  would  interest  any 
intelligent  citizen  and  would  appeal  particularly  to  lawyers. 
More  than  seven  hundred  written  opinions  have  been  rendered 
by  the  legal  department  to  the  Commission  for  the  First  Dis- 
trict, and  a  much  larger  number  of  oral  opinions. 

About  fifty  litigated  cases  have  been  tried  and  determined, 
not  including  cases  arising  under  the  Rapid  Transit  Act.  A 
brief  reference  to  several  of  the  reported  decisions  may  help  to 
illustrate  the  character  of  the  questions  involved. 

The  case  of  People  ex  rel.  Joline  v.  Willcox,1  arose  in  connec- 
tion with  the  attempt  of  our  Commission  to  establish  transfers 
on  certain  street  surface  lines  in  the  City  of  New  York.  The 
Supreme  Court  of  the  United  States  had  held  that  fixing  a 
rate  for  the  future  was  a  legislative  function  (Prentis  v.  Atlantic 
Coast  Line2),  but  the  Court  of  Appeals,  with  great  reluctance, 
felt  constrained  to  follow  the  views  formerly  expressed  by  the 
courts  of  this  State,  and  to  regard  the  fixing  of  a  rate  as  at 
least  quasi-judicial  and  subject  to  review  by  certiorari. 

i  129  App.  Div.  (N.  Y.)  267;  1908;  194  N.  Y.  383 ;  1909. 
»211  U.  S.  210;  1908. 


340  PUBLIC   SERVICE   COMMISSIONS 

In  Gubner  v.  McClellan,1  it  was  contended  that  the  Public 
Service  Commissions  Law  was  obnoxious  to  Section  16  of 
Article  3  of  the  State  Constitution,  as  being  a  private  and  local 
bill  embracing  more  than  one  subject,  and  that  it  violated 
Section  10  of  Article  8  in  that  it  provided  for  incurring  city 
debts  for  other  than  city  purposes.  Both  contentions  were 
overruled.  Numerous  other  objections  to  the  validity  of  the 
law  were  alleged  in  the  complaint,  but  were  not  argued  by  coun- 
sel nor  passed  upon  by  the  court. 

People  ex  rel.  South  Shore  Traction  Company  v.  Wfflcox*,  in- 
volved the  question  whether,  after  the  Commission  had  given 
its  approval  to  a  certain  route  proposed  by  a  surface  railroad 
company,  and  the  company  had  obtained  from  the  Board  of 
Estimate  and  Apportionment  what  is  called  its  local  or  second- 
ary franchise,  the  Commission  could  thereafter  decline  to  ap- 
prove the  construction  of  the  road  on  the  ground  that  it  was 
not  satisfied  with  the  terms  which  the  City  imposed.  The 
ordinary  procedure  for  a  company  desiring  to  establish  a  new 
line  is  to  apply  to  the  Commission  for  a  certificate  of  convenience 
and  necessity,  and  then  to  the  Board  of  Estimate  for  the  con- 
stitutional consent  of  the  local  authorities,  which  takes  the 
form  of  a  franchise  contract  and  contains  many  specific  terms. 
Then  the  Commission  is  called  upon  under  Section  53  of  the 
Law  to  authorize  construction  and  the  exercise  of  franchise 
rights.  In  the  case  of  the  South  Shore  Traction  Company  the 
Commission  had  found  that  the  route  proposed  was  ideal,  in 
fact  the  only  available  route  from  Jamaica  to  Manhattan  Island, 
but  when  the  matter  came  back  from  the  Board  of  Estimate 
and  the  franchise  contract  contained  certain  provisions  which 
the  Commissioners  did  not  approve  they  declined  to  give  their 
consent  under  Section  53.  The  courts  decided  that  the  Com- 
mission could  not  withhold  consent  on  the  grounds  stated. 
The  Court  of  Appeals,  however,  did  say  that  if  any  condition 

1  130  App.  Div.  (N.  Y.)  716 ;  1909. 

2  133  App.  Div.  (N.  Y.)  556;  1909 ;  196  N.  Y.  212;  1909. 


PUBLIC   SERVICE   COMMISSIONS  341 

imposed  by  the  local  authorities  should  conflict  with  provisions 
of  the  Public  Service  Commissions  Law  the  latter  law  should 
govern.  In  the  case  of  the  City  of  Troy  v.  United  Traction 
Company,1  it  appeared  that  the  City,  by  ordinance,  tried  to 
establish  a  ten-minute  headway  of  cars  on  certain  streets,  but 
the  Commission  for  the  Second  District  had  previously  fixed  a 
fifteen-minute  headway  as  reasonable.  The  court  held  that 
the  Public  Service  Commission  had  fixed  the  reasonable  head- 
way, after  a  hearing,  at  fifteen  minutes,  and  that  even  though 
the  City  had  made  the  ordinance  originally  it  could  not  reduce 
the  headway.  The  only  way  to  secure  relief,  provided  that 
relief  was  proper,  would  be  to  apply  to  the  Commission  itself 
for  rehearing  and,  if  necessary,  have  the  matter  reviewed  in 
court.  In  other  words,  the  Public  Service  Commissions  Law 
is  regarded  as  supreme,  even  as  against  the  City,  in  matters 
that  come  within  the  regulatory  powers  of  a  Commission. 

The  case  of  People  ex  rel.  New  York,  New  Haven  &  Hartford 
Railroad  Company  v.  Willcox,2  involved  the  question  of  handling 
certain  species  of  freight.  We  know  it  as  the  "Manure  Case," 
because  the  handling  of  that  refuse  caused  unpleasant  odors  in 
the  region  of  the  Harlem  River,  and  many  complaints  were 
made  to  the  Commission  by  persons  living  in  the  vicinity.  It 
seemed  to  come  within  the  general  provisions  of  the  Public 
Service  Commissions  Law,  and  the  Commission,  after  a  hear- 
ing, issued  an  order  to  the  Company  to  take  proper  sanitary 
precautions  in  loading  the  cars,  so  that  no  offensive  odors 
should  arise.  When  the  matter  finally  reached  the  courts  it 
was  decided  by  the  Appellate  Division,  four  to  one,  that  the 
Commission  had  a  right  to  direct  what  improvements  should 
be  made  in  the  handling  of  that  property,  but  in  the  Court  of 
Appeals  it  was  held,  four  to  three,  the  other  way.  The  decision 
turned  on  the  point  that  in  the  particular  case  presented  it  was 
a  matter  of  public  health  rather  than  of  transportation,  and 

1  134  App.  Div.  (N.  Y.)  756 ;  1909. 

2  138  App.  Div.  (N.  Y.)  330  ;  1910  ;  200  N.  Y.  423;  1911. 


342  PUBLIC   SERVICE   COMMISSIONS 

that  the  care  of  the  public  health  had  been  committed  by  the 
charter  so  exclusively  to  the  City  that  it  would  take  something 
very  much  stronger  than  the  general  language  of  the  Public 
Service  Commissions  Law  to  deprive  the  City  of  jurisdiction. 
In  the  course  of  the  prevailing  opinion  Judge  Gray,  referring 
to  the  Public  Service  Commissions  Law,  said  (p.  431) : 

The  object  of  the  legislature,  as  fairly  to  be  deduced  from  its  enact- 
ment, was  to  regulate  the  management  and  the  operations  of  common 
carriers,  within  the  state,  in  the  interest  of  the  public ;  that  is,  of  the 
persons  who  should  use  the  facilities  for  the  transporation  of  them- 
selves, or  of  their  property ;  who  should  serve  them ;  or  who  should 
be  interested  in  them,  as  holders  of  their  capital  stock,  or  obligations. 

In  other  words,  only  the  patrons,  employees,  shareholders  or 
bondholders  of  a  railroad  constitute  the  "public"  entitled  to 
protection  through  the  Commission.  If,  therefore,  property 
owners  along  the  line  of  a  steam  railroad  should  be  annoyed 
by  ashes,  smoke  or  cinders  from  locomotives  it  might  be  neces- 
sary to  call  upon  a  board  of  health  to  abate  the  nuisance. 

In  People  ex  rel.  Delaware  &  Hudson  Company  v.  Public  Serv- 
ice Commission  1  it  was  held  that  the  Public  Service  Commis- 
sion may  reduce  the  rate  of  fare  allowed  by  statute  without 
infringing  the  constitutional  prohibition  against  the  impair- 
ment of  contracts.  It  was  decided  that  the  act  authorizing 
the  Company  to  charge  twenty-five  cents  a  mile  was  not  a 
contract,  but  a  mere  gift  or  concession  and  not  a  general  right 
to  change  or  alter  or  amend  the  charter. 

In  Willcox  v.  Richmond  Light  and  Railroad  Company,2  the 
question  was  for  the  first  time,  I  think,  decided  in  this  State 
that  the  ordinance  of  a  village  was  in  effect  a  statute.  In  the 
New  Haven  Railroad  case,  just  referred  to,  Judge  Gray,  speak- 
ing of  the  duties  of  railroads  and  other  corporations  to  comply 
with  the  "provisions  of  law,"  said  (p.  432)  that  the  words 
"provisions  of  law"  did  not  mean  "all  the  provisions  of  the 
statute,  or  common  law,"  but  obviously  only  the  provisions  of 

1  140  App.  Div.  (N.  Y.)  839 ;  1910. 

»  142  App.  Div.  (N.  Y.)  44;  1910;  aff'd  202  N.  Y.  515;  1911. 


PUBLIC   SERVICE   COMMISSIONS  343 

the  Public  Service  Law;  but  I  think  even  Judge  Gray  would 
have  conceded,  if  the  point  had  been  pressed  upon  him,  that 
the  provisions  of  law,  even  when  limited  to  the  provisions  of  the 
Public  Service  Commissions  Law,  must,  by  implication,  cover 
any  provision  of  the  Railroad  Law  or  other  statutes  which  the 
Commission  is  obliged  to  enforce.  In  the  case  of  Willcox  v. 
Richmond  Light  &  Railroad  Company  1  there  were  presented 
two  village  ordinances  whereby  two  separate  surface  railroad 
companies  were  granted  rights  to  operate  within  the  village. 
In  accepting  the  ordinances  the  companies  agreed  to  exchange 
transfers  with  intersecting  roads  wherever  their  lines  met 
within  the  village  limits.  Having  refused  to  comply  with  the 
request  for  transfers,  a  mandamus  proceeding  was  brought 
to  compel  them  to  do  it.  It  was  held  by  Mr.  Justice  Clarke, 
in  Richmond,  in  an  opinion  which  was  adopted  by  the  Appel- 
late Division  in  Brooklyn,  that  where  there  is  a  violation  of 
law,  as  the  term  is  used  in  Section  57  of  the  Public  Service 
Commissions  Law,  the  Commission  may  compel  the  fulfill- 
ment of  the  obligation ;  and  that  the  failure  to  comply  with  the 
requirement  of  an  ordinance  which  had  been  duly  accepted 
was  as  much  a  violation  of  law  as  would  have  been  a  violation 
of  a  statute. 

There  are,  of  course,  many  other  decisions  affecting  different 
provisions  of  the  Public  Service  Commissions  Law.  They  are 
all  interesting  to  those  concerned.  Perhaps  reference  may  be 
permitted  to  the  following : 

Peo.  ex  rel.  Delaware  and  Hudson  Co.  v.  Stevens,  134  App.  Div.  99 ; 
1909.     197  N.  Y.  1 ;  1909. 

Peo.  ex  rel.  Cohoes  Railway  Co.  v.  Public  Service  Commission,  143 
App.  Div.  769;  1911.     202  N.  Y.  547;  1911. 

Peo.  ex  rel.  Binghampton  Light,  Heat  and  Power  Co.  v.  Stevens,  143 
App.  Div.  789;  1911.    203  N.  Y.  7;  1911. 

Public  Service  Commission  v.  Westchester  Street  Railroad  Co.,  151 
App.  Div.  914;  1912.    206  N.  Y.  209;  1912. 

Peo.  ex  rel.  New  York  Edison  Co.  v.  Willcox,  151  App.  Div.  832; 
1912.    207  N.  Y.  86;  1912. 

1  Supra. 


344  PUBLIC  SERVICE   COMMISSIONS 

Public  Service  Commission  v.  New  York  Railways  Co.,  77  Misc.  487; 
1912.  . 

Peo.  ex  rel.  Bridge  Operating  Co.  v.  Public  Service  Commission,  153 
App.  Div.  129;  1912. 

Peo.  ex  rel.  Kings  County  Lighting  Co.  v.  Willcox,  156  App.  Div. 
603.  157  App.  Div.  922;  1913.  210  N.  Y.  479;  1914. 

Matter  of  Public  Service  Commission  (Re  Mendel),  162  App.  Div. 
371;  1914.  214  N.  Y.  46;  1915. 

Peo.  ex  rel.  Dry  Dock,  &c.  Railroad  Co.  v.  Public  Service  Commission, 
167  App.  Div.  286;  1915. 

Public  Service  Commission  v.  New  York  and  Queens  County  Railway 
Co.,  170  App.  Div.  580;  1915. 

In  concluding  this  portion  of  the  address  I  would  refer  to  a 
single  further  case,  People  ex  rel.  Ulster  &  Delaware  Railroad 
Company  v.  Public  Service  Commission,  reported  in  the  New 
York  Law  Journal  of  January  31,  1916. 

The  case  involved  a  construction  of  Section  60  of  the  Rail- 
road Law  and  Sections  33  and  49  of  the  Public  Service  Com- 
missions Law.  The  question  flatly  presented  was  whether 
when  a  statute  prescribed  a  rate  of  fare  to  be  charged  as  a 
maximum  the  Commission,  under  its  regulatory  powers,  might 
authorize  an  increase  of  rate  above  the  statutory  limit,  if  in 
its  judgment  the  increase  was  necessary  in  order  to  provide  a 
fair  return  for  service  rendered.  The  Commission  had  decided 
that  it  had  no  power  to  grant  the  increase.  The  Appellate 
Division  of  the  Second  Department  divided  three  to  two, 
Mr.  Justice  Cochrane  writing  the  prevailing  opinion,  in  which 
Justices  Lyon  and  Howard  concurred,  declared  the  authority 
of  the  Commission  to  increase  mileage  book  rates  above  two 
cents  per  mile,  the  maximum  fixed  by  the  Railroad  Law.  Jus- 
tices Kellogg  and  Woodward  dissented  in  elaborate  opinions. 
The  case  will  certainly  be  taken  to  the  Court  of  Appeals,  but 
has  not  yet  been  argued  there.1 

1  The  opinions  of  the  Appellate  Division  appear  in  171  App.  Div.  607. 
Upon  appeal  to  the  Court  of  Appeals,  upon  a  question  certified,  the  order  of 
the  Appellate  Division  was  affirmed  "on  the  opinion  of  Cochrane,  J.,  below." 
The  Court  of  Appeals  divided  four  to  three,  218  N.  Y.,  memoranda. 


PUBLIC   SERVICE   COMMISSIONS  345 

There  was  no  express  provision  in  the  Public  Service  Com- 
missions Law  for  court  review  of  the  Commission's  determina- 
tions. It  was  urged  at  the  time  that  there  should  be  some 
such  provision,  but  none  has  ever  been  inserted.  However, 
it  is  found  that  in  most  cases  the  decisions  of  the  Commission, 
taking  the  form  of  orders,  may  be  reviewed  by  certiorari  under 
the  provisions  of  the  Code  of  Civil  Procedure;  in  that  way 
every  judicial  question  may  be  presented  and  disposed  of. 
And  if  the  proceeding  appears  to  have  been  taken  in  good 
faith,  even  though  unsuccessful,  the  pendency  of  the  litigation 
prevents  the  enforcement  of  penalties  that  otherwise  might 
have  been  imposed  under  Section  24  of  the  Law. 

Personally  I  believe  in  the  right  of  judicial  review,  even 
though  it  cause  some  delay  in  the  carrying  out  of  orders. 
Where  the  matter  reviewed  involves  technical  knowledge,  or  a 
full  and  careful  consideration  of  facts,  if  the  record  is  suffi- 
ciently clear  I  think  the  tendency  of  courts  will  be  less  and 
less  to  interfere  with  the  decisions  of  a  properly  constituted 
board.  The  burden  put  upon  the  relator  under  the  Code  pro- 
visions for  review  by  certiorari  is  such  that  only  a  very  strong 
case  should  prevail  against  the  determination  of  the  Commission. 

When  the  Law  became  operative,  on  July  1,  1907,  the  City 
of  New  York  was  suffering  from  severe  financial  depression. 
Before  the  end  of  that  year,  or  very  shortly  thereafter,  nearly 
every  surface  railroad  line  in  Manhattan  was  in  the  hands  of  a 
receiver.  It  was  a  very  unpropitious  time  to  begin  adminis- 
tering a  law  which  contained  so  many  teeth  and  which  imposed 
upon  the  Commissioners  so  many  duties  involving  apparently 
endless  investigation  and  the  solution  of  long-standing  prob- 
lems. In  the  beginning  there  was  much  opposition  to  their 
action  on  the  part  of  corporations  and  much  dissatisfaction  on 
the  part  of  the  general  public.  But  many  of  the  questions 
that  eight  years  ago  vexed  both  the  public  and  the  corporations 
have  since  been  laid  to  rest.  Commissioners  have  come  and 
Commissioners  have  gone.  But  the  law  itself  has  been  grad- 


346  PUBLIC   SERVICE   COMMISSIONS 

ually  clarified  either  by  amendment  or  by  actual  decisions  of 
the  courts,  and  as  it  stands  to-day  is  pretty  nearly,  I  think,  as 
the  Commission  and  the  public  generally  would  have  it. 

At  the  present  time  I  believe  every  state  in  the  Union  (except 
Delaware  and  Utah)  has  established  a  commission  of  its  own, 
and  the  District  of  Columbia  has  one.  In  compliance  with  the 
further  suggestion  of  the  Committee  on  Lectures  I  shall  re- 
frain from  discussing  the  philosophy  or  psychology  of  Public 
Service  Commissions  as  a  whole,  and  shall  leave  that  broader 
field  to  my  brother  Guthrie  for  consideration  at  the  next  meet- 
ing. But  with  respect  to  the  particular  Commission  with 
which  I  have  been  intimately  associated  for  eight  years  past, 
after  an  experience  of  twice  that  length  of  time  in  the  City's 
Law  Department,  it  is  my  privilege  and  pleasure  to  state  that 
I  have  never  seen  a  better  esprit  de  corps  among  so  many  men 
and  have  never  seen  a  larger  volume  of  novel,  difficult  and 
important  work  better  performed  than  by  the  members  of  the 
staffs  of  the  various  departments  of  the  Public  Service  Com- 
mission. It  is  impossible  always  to  satisfy  the  public  or  the 
corporations  in  the  attempt  to  carry  out  the  evident  purpose 
of  the  Law;  but  I  believe,  gentlemen,  that  in  the  process  of 
time,  with  the  aid  of  the  men  themselves  who  represent  the 
corporations,  and  with  the  aid  and  advice  of  the  courts,  and 
with  the  cooperation  of  the  people,  the  conviction  will  be 
strengthened  that  Governor  Hughes  made  no  mistake  in  giving 
his  prompt  and  vigorous  attention  to  establishing  a  compre- 
hensive system  for  the  regulation  and  control  of  public  utilities. 


PUBLIC  SERVICE  COMMISSIONS 

A  Lecture  Delivered  before  the  Association  of  the  Bar  of  the  City  of  New  York, 
by  William  D.  Guthrie,  April  5,  1916. 

IN  his  interesting  and  instructive  address  last  Wednesday 
evening,  Mr.  George  S.  Coleman  recalled  to  our  minds  the  pur- 
poses of  those  who  in  1907  promoted  the  governmental  experi- 
ment involved  in  the  creation  of  public  service  commissions 
vested  with  broad  powers  of  regulation  over  businesses  now  ge- 
nerically  called  public  utilities.  Most  of  us,  I  assume,  agree  with 
him  that  the  theory  of  regulation  by  commission  is  sound,  that 
these  commissions  ought  to  be  continued  as  permanent  depart- 
ments of  government,  and  that  they  should  be  made  effective 
and  satisfactory  instruments  for  the  service  of  the  public.  I 
want  to  urge  this  evening,  although  in  a  manner  necessarily 
cursory  and  incomplete,  that  public  service  commissions  can 
be  made  permanently  useful  and  successful  only  by  observing 
three  conditions,  namely,  (1)  by  limiting  their  powers  to  fewer 
and  simpler  functions,  (2)  by  appointing  as  commissioners  men 
who  are  really  experts,  qualified  as  such  by  technical  training 
and  practical  experience,  and  (3)  by  eliminating  all  exercise  of 
judicial  power,  or,  if  any  judicial  power  be  retained,  then  by 
affording  the  full  judicial  review  necessary  for  the  protection  of 
the  rights  of  those  whose  property  and  business  are  affected  by 
such  regulation. 

It  seems  to  me  that  you  will  regard  it  as  quite  fitting  and  proper 
for  me  to  say  that  no  one  in  the  employ  of  our  state  or  muni- 
cipality in  recent  years  has  rendered  more  efficient  or  valuable 
public  service  or  service  of  a  higher  standard  of  professional 
merit  than  Mr.  Coleman  has  rendered  as  head  of  the  law 
department  of  the  Public  Service  Commission  for  the  first  dis- 

347 


348  PUBLIC  SERVICE   COMMISSIONS 

trict.1  He  was  exceptionally  equipped  to  undertake  the  work 
after  sixteen  years  of  conspicuously  able  service  in  the  office  of 
the  Corporation  Counsel.  Certainly  to  his  advice,  manage- 
ment and  direction  as  counsel  to  the  commission  under  many 
discouraging  difficulties  are  due  in  great  measure  whatever 
success  has  attended  its  work  so  far  and  whatever  promise  its 
past  labors  and  performances  hold  out  for  the  future.  I  believe 
that  this  is  generally  recognized  by  the  profession  and  that  it 
awards  to  him  the  credit  he  deserves. 

Of  the  political  phenomena  of  our  times,  perhaps  none  is 
more  striking  than  the  constant  extension  of  the  functions 
of  government,  with  the  consequent  multiplication  of  public 
officials  and  increase  of  public  expenditures.  .  The  tendency 
to  extend  the  activities  of  the  state  has  been  world-wide,  for 
manifestations  of  it  are  observable  in  every  country,  whatever 
the  form  of  government  may  be.  In  the  United  States  we  are 
developing  at  enormous  cost  in  the  most  intensive  fashion  a 
multitudinous  bureaucracy  with  autocratic  powers  and  arbitrary 
discretion  and  a  vast  system  of  complicated  and  often  conflict- 
ing administrative  jurisdictions  in  business  matters  which  reach 
and  affect  almost  every  individual,  and  most  of  which,  only  a 
few  years  ago,  would  have  been  regarded  as  of  strictly  private 
concern.  We  are  vesting  and  combining  in  administrative 
bodies  extensive  legislative,  administrative  and  judicial  powers 
in  distinct  and  reckless  disregard  of  the  sound  principle  of  the 
separation  of  governmental  powers  which  was  deemed  so  essential 
by  the  wise  founders  of  our  governments.  Even  controverted 
questions  of  law  and  fact  heretofore  regarded  as  exclusively 
for  judicial  determination  we  are  entrusting  to  bureaucratic 
discretion,  and  for  orderly  judicial  procedure  and  the  com- 
petent and  impartial  interpretation  and  enforcement  of  the 
laws,  we  are  substituting  arbitrary  methods  and  untrained 
judgment.  The  increase  in  public  functionaries  and  public 
expenditures  within  the  past  twenty  years  has  been  at  a  rate 

i  New  York. 


PUBLIC   SERVICE   COMMISSIONS  349 

which  is  regarded  by  many  thoughtful  observers  with  alarm  as 
imperiling  not  only  our  liberties  but  the  very  solvency  of  the 
state. 

The  particular  subject  of  public  service  commissions  fur- 
nishes an  instructive  illustration  of  this  tendency  towards 
bureaucracy  in  our  national  and  state  governments.  The 
Federal  Interstate  Commerce  Commission,  which  began  its 
work  in  1887  wjth  a  staff  of  a  few  secretaries,  stenographers 
and  messengers  at  an  annual  expenditure  of  $97,800,  has 
developed  into  an  immense  bureau  with  an  organization  of 
2,500  employees,  and  its  maintenance  now  calls  for  an  annual 
appropriation  by  Congress  of  nearly  $5,000,000.  So,  likewise, 
our  own  Public  Service  Commission  for  the  first  district,  which 
began  its  activities  only  nine  years  ago  with  a  staff  of  326  em- 
ployees and  an  annual  expenditure  of  a  few  hundred  thousand 
dollars,  is  now  operating  with  an  organization  of  2,300  em- 
ployees at  an  annual  cost  of  more  than  $3,600,000,  although 
this  staff  and  expense  will,  it  is  expected,  be  curtailed  as  soon 
as  the  pending  rapid  transit  construction  is  completed. 

Almost  every  state  in  the  Union  has  similarly  created  regu- 
latory commissions  under  varying  names,  such  as  public  serv- 
ice, public  utilities  and  railroad  commissions.  Not  only  the 
legislative  bodies,  but  all  of  these  commissions  are  constantly 
at  work  regulating  the  use  of  private  property  and  exercising  a 
control  over  business  that  is  being  gradually  extended  and 
broadened  and  made  more  and  more  oppressive  year  after  year. 
Indeed,  as  Chief  Judge  Cullen  warningly  said  in  one  of  his 
opinions  l :  "  The  great  misfortune  of  the  day  is  the  mania  for 
regulating  all  human  conduct  by  statute,  from  responsibility 
for  which  few  are  exempt,  since  many  of  our  most  intelligent 
and  highly  educated  citizens,  who  resent  as  paternalism  and 
socialism  legislative  interference  with  affairs  in  which  they  are 
interested,  are  most  persistent  in  the  attempt  to  regulate  by 
law  the  conduct  of  others." 

!204N.Y.  534;  1912. 


350  PUBLIC  SERVICE   COMMISSIONS 

In  our  own  state,  during  the  past  five  years  our  legislators 
have  enacted  3,555  separate  statutes  covering  11,674  printed 
pages  of  laws.  The  fruits  of  the  labors  of  the  pending  session 
at  Albany  are  not  yet  known.  President  Elliott,  of  the  New 
Haven  Railroad  Company,  in  his  recent  address  at  Washing- 
ton before  the  Chamber  of  Commerce  of  the  United  States, 
declared  that  "from  1909  to  1915  the  states  enacted  60,001 
and  Congress  enacted  2,013  new  laws  which  involved  the  con- 
sideration of  more  than  one-half  million  legislative  propositions, 
or  an  annual  production  of  over  12,000  new  laws  to  be  assimi- 
lated by  the  business  world,"  and  that  "the  Sixty-Third 
Congress  alone  considered  30,053  bills  and  enacted  700."  The 
total  cost  to  the  taxpayers  of  the  country  of  the  regulation  of 
business  by  direct  legislation  and  by  commissions  is  stupen- 
dous; but,  in  addition  to  this  more  or  less  common  burden 
imposed  on  the  taxpayers  of  all  classes,  there  is  further  imposed 
upon  the  businesses  regulated  an  enormous  expense  in  comply- 
ing with  statutory  and  administrative  regulations  sometimes 
of  no  practical  benefit  to  any  one,  and  frequently  a  hindrance  to 
business.  The  single  item  of  the  voluminous  reports  and  statis- 
tics which  the  national  and  state  commissions  require  to  be 
furnished  involves  an  annual  expense  of  millions  of  dollars  to 
the  industries  being  regulated.  In  fact,  the  cost  of  regulation 
so  far  has  been  out  of  all  proportion  to  the  service  rendered  by 
these  commissions,  the  protection  afforded,  or  the  benefit  secured. 

Whilst  in  many  respects  the  regulation  of  business  by  com- 
mission is  still  experimental,  and  it  has  yet  to  be  proved  that 
any  such  extensive  and  complicated  bureaucratic  system  can 
be  successful,  or  that  these  bodies  are  competent  to  exercise 
beneficially  and  satisfactorily  the  far-reaching  jurisdictions  and 
vast  powers  already  vested  in  them,  they  are  nevertheless  at 
almost  every  session  of  Congress  or  state  legislature  having 
granted  to  them  still  more  extensive  jurisdiction  and  still  greater 
powers  and  duties  of  regulation  and  control.  They  are  being 
compelled  to  undertake  such  multiform  tasks  and  to  perform 


PUBLIC   SERVICE   COMMISSIONS  351 

functions  so  complex,  so  comprehensive  and  so  gigantic  in 
scale  as  to  be  quite  beyond  the  capacity  of  any  one  body  of 
men  however  talented,  and  the  commissioners  are  forced  to 
neglect  many  of  their  functions  and  to  rely  upon  subordinates 
for  the  performance  of  many  of  their  duties.  The  commissions 
are  being  paralyzed  by  having  altogether  too  much  to  do  and 
by  attempting  to  deal  with  too  many  non-essential  details. 
In  truth,  they  are  finding  themselves  unable  to  see  the  forest 
because  of  the  trees. 

Statistics  taken  from  the  latest  annual  report  of  the  Inter- 
state Commerce  Commission  submitted  to  Congress  for  the 
year  ending  October  31,  1915,  will  show  the  extent  to  which 
the  federal  body  is  being  overwhelmed  and  swamped.  The 
commission  during  that  one  year  conducted  1,543  hearings  in 
the  course  of  which  it  took  200,438  pages  of  testimony.  It 
heard  oral  arguments  in  198  cases;  it  decided  902  cases  upon 
what  it  terms  its  "formal  docket";  6,500  separate  complaints 
were  entered  upon  its  "informal  docket"  and  6,690  applica- 
tions upon  its  "special  docket,"  and  it  made  822  orders  under 
the  "long-and-short-haul"  clause.  No  less  than  149,449  rate 
schedules  were  filed  with  it,  which  in  theory  at  least  the  com- 
mission is  supposed  to  examine  and  digest,  that  is,  an  average 
of  500  rate  schedules  per  working  day.  The  report  of  the  com- 
mission then  adds,  perhaps  protestingly,  if  not  despairingly, 
that  "a  mere  recital  of  these  figures  scarcely  gives  an  adequate 
idea  of  the  volume  of  work  disposed  of  and  the  enormous 
interests  involved  in  the  cases  that  came  before  the  commis- 
sion." Yet,  at  the  present  session  of  Congress  it  is  proposed  to 
increase  the  duties  of  the  commission  still  further  by  vesting  in 
it  control  over  corporate  finances  and  the  issuing  of  corporate 
securities  and  by  greatly  extending  its  inquisitorial  powers. 
One  of  the  pending  bills,  for  example,  would  grant  to  the  com- 
mission and  its  special  agents  and  examiners  access  to  all  the 
"accounts,  records,  memoranda,  correspondence,  documents, 
papers,  and  other  writings,  and  indexes  thereto,  regardless  of 


352  PUBLIC  SERVICE   COMMISSIONS 

the  dates  thereof,  relating  to  financial  transactions  of,  for,  or 
with  [any]  carrier,  and  kept  or  preserved  by  or  for,  or  in  the 
custody  or  under  the  control  of  ...  any  director,  stockholder, 
officer,  agent,  attorney  [and]  employee"  as  well  as  of  "any  other 
person,  persons,  corporation,  joint-stock  company,  or  corporate 
combination  having,  or  having  had,  any  financial  transactions 
with  or  for  [a]  carrier."  This  sweeping  power  is  to  be  con- 
ferred under  the  notion  that  it  is  necessary  in  order  to  enable 
the  commission  to  determine  what  are  reasonable  rates. 

The  next  step  to  be  taken  —  and  this  is  being  strenuously 
advocated  by  the  champions  of  the  commission  system  —  will 
be  to  grant  power  to  the  Interstate  Commerce  Commission  to 
fix  the  wages  of  railroad  employees,  on  the  ground  that  this  is 
an  item  of  paramount  influence  in  the  cost  of  the  service  rendered 
by  carriers  and  of  much  more  importance  in  rate-making  than 
the  issuing  of  securities  or  the  rate  of  interest  payable  upon 
money  borrowed  by  corporations.  It  is  argued  that  the  grant- 
ing of  this  additional  power  would  accord  with  justice  and  com- 
mon sense,  that  it  is  absolutely  necessary  for  the  protection  of 
the  public  who  use  the  railways,  and  that,  as  the  commission 
now  regulates  rates  and  exercises  broad  and  far-reaching  super- 
vision over  the  business  of  the  carriers,  it  should  regulate  em- 
ployees as  well  as  employers  and  be  in  a  position  to  say  whether 
or  not  the  wages  of  engineers,  conductors,  firemen,  trainmen 
and  track  workers  should  be  increased  or  reduced.  The  same 
reasoning  would,  of  course,  include  all  the  supplies  and  equip- 
ment of  railways  and  the  wages  of  those  producing  them. 
American  labor  may  some  day  find  that,  under  the  euphemistic 
nomenclature  of  arbitration  made  compulsory  by  law,  we  have 
drifted  into  enacting  a  new  form  of  the  English  Statute  of 
Labourers.  And  the  commission  would  then  find  itself  the 
storm-center  of  industrial  disputes,  with  all  its  time  and  atten- 
tion engrossed  in  investigating  and  determining  what  it  should 
adjudge  to  be  reasonable  wages  for  railroad  employees  in  every 
state  of  the  Union  under  infinitely  varying  conditions. 


PUBLIC   SERVICE   COMMISSIONS  353 

The  work  of  the  New  York  Public  Service  Commissions  — 
at  least  in  the  first  district  —  is  scarcely  less  onerous  and  mul- 
tifarious than  that  of  the  Interstate  Commerce  Commission. 
Indeed,  the  jurisdiction  of  the  New  York  commissions  is  much 
more  extensive,  for  it  applies  not  only  to  carriers  by  railroad 
but  to  the  varying  and  dissimilar  businesses  of  street  railways, 
telegraph  and  telephone  lines,  gas  and  electric  light  and  power 
plants,  steam  plants,  stockyards,  stages  and  busses,  and  other 
public  utilities,  including  in  the  first  district  the  construction 
of  rapid  transit  facilities.  The  New  York  commissions  also 
supervise  and  control  the  issuing  of  corporate  securities,  re- 
organizations, transfers  of  franchises,  etc.,  and  are  constantly 
employed  in  the  exercise  of  judicial  powers  and  in  the  deter- 
mination of  extremely  complicated  questions  of  law  and  of  fact. 
The  commission  in  the  first  district  in  its  latest  report  states 
that  during  the  year  1915  it  received  5,732  complaints  and  held 
812  hearings  in  337  "formal  cases."  But  these  hearings  con- 
stituted only  a  small  part  of  the  work  of  the  commission.  To 
mention  only  a  few  other  items,  the  commission  in  the  first 
district  reports  that  it  supervised  generally  the  business  of  102 
public  service  companies  having  an  aggregate  capital  of 
$1,325,273,548,  not  including  certain  holding  companies  and 
trunk  line  railroads  which  are  under  the  jurisdiction  of  the  com- 
mission as  to  certain  special  matters ;  that  it  inspected,  in  236 
manufacturing  plants  located  in  143  towns  and  cities  scattered 
through  17  different  states,  construction  material  valued  at 
$11,500,000;  that  it  maintained  a  chemical  laboratory  for  the 
testing  of  materials;  that  it  awarded  subway  contracts  aggre- 
gating $26,000,000,  bringing  the  total  of  these  contracts  up  to 
about  $168,000,000 ;  that  it  passed  upon  applications  for  issues 
of  corporate  stocks  and  bonds  and  authorized  the  same  to  the 
extent  of  $23,000,000,  making  the  total  amount  of  the  issues 
thus  authorized  $635,159,477,  and  that  it  tested  383,401  gas 
meters  during  the  year  1915,  bringing  the  total  number 
of  meters  tested  up  to  3,088,155.  In  addition  to  these  vast 

2A 


354  PUBLIC   SERVICE   COMMISSIONS 

administrative  details,  the  supervision  of  the  subway  construc- 
tion, and  very  extensive  and  difficult  judicial  labors,  more  than 
sufficient,  if  thoroughly  done,  to  have  engrossed  all  the  time 
and  thought  of  a  dozen  commissions  of  trained  experts,  the 
commissioners  were  constantly  formulating  rules  and  orders, 
with  the  power  to  make  disobedience  to  their  orders  or  fiats  a 
criminal  offense  and  punishable  as  such. 

The  powers  originally  vested  in  the  Interstate  Commerce 
Commission  by  the  Act  of  Congress  of  1887  were  quite  suffi- 
cient for  any  one  body  to  exercise ;  but  these  powers  have  been 
so  extended  and  are  so  varied  as  to  create  a  volume  of  work 
beyond  the  capacity  of  any  one  commission.  The  powers  now 
vested  in  and  exercised  by  the  New  York  Public  Service  Com- 
missions, particularly  the  commission  for  the  first  district,  and 
the  varied  duties  they  attempt  to  perform  are  likewise  beyond 
the  capacity  of  any  single  body  of  five  members,  or  even  half 
a  dozen  such  bodies.  They  are  expected  to  supervise  and  solve 
the  most  difficult  and  intricate  problems  of  corporate  finance 
and  the  issuing  and  refunding  of  corporate  securities  and  the 
reorganization  of  corporations.  They  must  fix  reasonable  rates 
in  the  varying  businesses  under  their  control.  They  are 
expected  to  regulate  the  management  of  innumerable  details 
of  many  complex  businesses.  They  must  determine  intricate 
questions  as  to  the  operation  of  all  classes  of  public  utilities. 
They  must  have  encyclopedic  knowledge  and  talents  such  as 
no  one  board  of  directors  could  rationally  be  expected  to 
possess.  They  constantly  substitute  their  judgment  as  to 
business  questions  for  the  judgment  of  the  trained  and  expert 
managers  of  the  102  corporations  regulated.  The  supervision 
of  the  dual  subway  enterprise  alone,  during  the  period  of  pro- 
motion, experiment  and  construction,  involved  the  greatest 
municipal  undertaking  in  history  and  a  task  of  the  utmost 
complexity  and  difficulty,  and  required  exceptional  expert 
knowledge  and  constant  and  strenuous  labor  sufficient  to  en- 
gross the  time  and  attention  of  the  five  commissioners;  yet 


PUBLIC   SERVICE   COMMISSIONS  355 

the  commissioners,  busy  if  not  overwhelmed  with  innumerable 
other  important  and  difficult  tasks,  were  compelled  to  take  up 
this  stupendous  additional  task  and  to  act  in  the  capacity  of 
negotiators,  financiers  and  expert  engineers.  A  great  business 
concern,  for  example  the  Pennsylvania  Railroad  Company, 
would,  of  course,  have  placed  the  supervision  of  the  planning 
and  construction  of  such  a  system  in  charge  of  trained  engineers 
of  experience  and  established  reputation  —  experts  of  the  stand- 
ing of  Mr.  Barclay  Parsons,  Messrs.  Jacobs  and  Davies,  Mr. 
Bion  Arnold  —  and  certainly  would  not  have  turned  the  whole 
matter  over  to  a  commission  or  committee  composed  of  five 
members,  not  one  of  whom  at  that  time  had  ever  had  any  tech- 
nical training  or  practical  experience  in  such  work. 

That  the  commissions  are  being  overburdened  and  over- 
whelmed with  the  many  tasks  imposed  upon  them  has  long 
been  recognized  by  those  who  are  familiar  with  the  system  and 
competent  to  judge.  In  an  address  delivered  in  1907,  Com- 
missioner Prouty,  of  the  Interstate  Commerce  Commission, 
used  the  following  language :  "  If  the  Interstate  Commerce 
Commission  is  vested  with  a  jurisdiction  so  tremendous  in 
extent,  and  of  such  finality,  every  effort  should  be  made  to 
provide  a  body  adequate  to  the  trust.  ...  I  very  much 
doubt  whether  the  same  body  can  properly  discharge  both 
these  functions  [executive  and  judicial].  In  the  end  it  will 
either  become  remiss  in  its  executive  duties  or  will,  in  the  zeal 
of  these,  become  unfit  for  the  dispassionate  performance  of  its 
judicial  functions.  Whatever  may  have  been  true  in  the  past, 
the  time  has  come  when  the  commission  should  be  relieved  of 
all  its  duties  except  the  hearing  and  deciding  of  complaints." 

This  and  similar  advice  and  admonition  have  been  wholly 
disregarded,  not  only  by  Congress  but  by  the  state  legislatures. 
Despite  the  enormous  burden  of  executive,  administrative  and 
judicial  duties  existing  in  1907,  the  powers  of  the  Interstate 
Commerce  Commission  have  since  then  been  increased,  and 
it  is  exercising  in  an  ever  extending  measure  the  most  far- 


356  PUBLIC   SERVICE   COMMISSIONS 

reaching  legislative,  executive  and  judicial  functions.  This  is 
equally  true  of  the  state  commissions.  In  my  judgment  the 
fact  that  the  commissions  have  become  ineffective  and  dis- 
credited in  public  opinion  is  due  principally  to  their  being  over- 
burdened and  overwhelmed  with  a  multiplicity  of  tasks  and  a 
mass  of  extremely  difficult  and  complicated  duties  which  they 
cannot  possibly  perform  in  any  satisfactory  manner.  As  a 
consequence,  to  quote  what  a  distinguished  statesman  recently 
declared,  "the  very  name  *  regulation'  has  become  an  offense 
and  an  abomination  to  many  honest  business  men." 

I,  therefore,  submit  that  the  first  step  to  be  taken  is  to 
limit  the  functions  of  these  commissions  to  fewer  and  simpler 
tasks,  which  will  be  within  the  capacity  of  one  body  of  five  or 
seven  or  nine  men  to  attend  to  intelligently  and  competently. 

In  the  inspiring  address  which  Mr.  Justice  Hughes  delivered 
before  the  State  Bar  Association  in  January,1  he  must  have 
had  particularly  in  mind  our  public  service  commissions  when 
he  said  that  "the  ideal  which  has  been  presented  in  justifica- 
tion of  these  new  agencies,  and  that  which  alone  holds  promise 
of  benefit  rather  than  of  hurt  to  the  community,  is  the  ideal  of 
special  knowledge,  flexibility,  disinterestedness  and  sound  judg- 
ment applying  broad  legislative  principles  that  are  essential  to 
the  protection  of  the  community  and  of  every  useful  activity 
affected,  to  the  intricate  situations  created  by  expanding  enter- 
prise. But  mere  bureaucracy  —  narrow,  partisan,  or  inexpert 
—  is  grossly  injurious ;  it  not  only  fails  of  the  immediate  pur- 
pose of  the  law  and  is  opposed  to  traditions  which  happily  are 
still  honored,  but  its  failure  creates  a  feeling  of  discouragement 
bordering  on  pessimism  which  forms  the  most  serious  obstacle 
to  real  improvements  in  the  adjustment  of  governmental 
methods  to  new  exigencies." 

It  must  be  apparent  that,  above  all  other  considerations,  the 
ideal  as  well  as  the  indispensable  condition,  if  we  are  reasonably 

1  1916. 


PUBLIC   SERVICE   COMMISSIONS  357 

to  expect  success  in  this  new  governmental  departure  and  ex- 
periment, is  special  knowledge,  that  is,  knowledge  which  comes 
from  technical  training  and  practical  experience,  which  the 
public  at  large  does  not  possess,  and  which  it  cannot  in  the 
very  nature  of  things  be  expected  to  possess.  This  special 
knowledge  is  ordinarily  to  be  found  only  in  trained  experts. 
In  an  interesting  and  able  article  in  the  World's  Work  for 
February,1  a  competent  critic,  the  well-known  banker,  Mr. 
Kahn,  states  that  although  the  Interstate  Commerce  Commis- 
sion "has  greater  powers  and  greater  responsibilities  concern- 
ing the  industrial  life  of  the  nation  than  probably  any  other 
tribunal  anywhere  in  the  world  exercises,  there  has  never  yet 
been  appointed  a  man  who  came  to  it  qualified  by  first-rate 
experience  in  railway  operation,  or  by  broad  business  experi- 
ence, or  any  considerable  experience  in  financial  matters."  A 
ray  of  light  and  promise  appears  in  the  Federal  Reserve  Bank- 
ing Act,  which  provides  that  the  "Federal  Reserve  Agent"  of 
each  bank  must  be  a  person  of  "tested  banking  experience." 
This  is  a  precedent  to  be  followed. 

In  nine  years  we  have  had  in  the  first  district  fourteen  public 
service  commissioners,  most  of  whom  were  lawyers  by  profes- 
sion. Yet  not  one  of  these  gentlemen  before  his  appointment, 
so  far  as  I  have  been  able  to  ascertain,  had*  had  any  special 
knowledge  of  any  of  the  various  complicated  businesses  over 
which  he  was  to  exercise  the  most  extensive  powers  of  super- 
vision and  control.  Certainly  none  of  them  had  such  expert 
knowledge  derived  from  technical  training  or  practical  experi- 
ence in  these  matters  as  would  have  warranted  any  large  private 
concern  in  placing  such  comprehensive  powers  in  his  hands. 
Only  one  of  the  present  commissioners  has  been  in  office  a 
year,  and  his  training  when  appointed  had  been  that  of  a  law- 
yer with  little  or  no  practice  or  experience  in  the  particular 
industries  he  was  to  regulate.  I  am  not  disparaging  his  talents 
or  his  ability  as  a  lawyer.  I  am  simply  pointing  out  that  he 

»  1916. 


358  PUBLIC   SERVICE   COMMISSIONS 

was  not  an  expert  and  did  not  have  the  special  knowledge  which 
Mr.  Justice  Hughes  recognizes  as  indispensable  and  which,  he 
says,  alone  holds  out  promise  of  benefit  rather  than  of  hurt  to 
the  community.  Four  of  the  present  commissioners  have  been 
in  office  but  a  few  weeks.  It  is  true  that  they  are  men  of 
ability  and  character,  but  none  of  them  is  really  an  expert  in 
any  one  of  the  businesses  which  the  commission  supervises  and 
regulates.  Mr.  Hodge  is  a  capable  engineer  of  experience  and 
established  reputation  but  has,  I  understand,  had  little  to  do 
with  the  particular  businesses  he  will  now  supervise.  Although 
Mr.  Whitney  as  secretary  of  the  commission  undoubtedly  ac- 
quired much  information  which  must  be  of  great  service  to  the 
commission  and  the  public,  nevertheless  I  doubt  whether  he 
would  seriously  class  himself  as  a  trained  and  experienced  expert 
in  any  one  of  the  businesses  placed  under  the  regulation  and 
control  of  the  commission.  The  distinguished  and  public- 
spirited  chairman  was  trained  as  a  lawyer;  but  he  withdrew 
from  practice  thirty-five  years  ago  to  enter  private  business, 
and  his  business  experience  and  public  work  since  then  have 
not  been  such  as  to  give  him  special  knowledge  of  any  of  the 
businesses  under  the  jurisdiction  of  his  commission.  I  am  in- 
formed that  he  candidly  so  stated  when  he  accepted  the  appoint- 
ment. Moreover,  none  of  the  present  commissioners  could 
reasonably  be  said  to  have  had  such  training  in  the  law  of  this 
state  as  we  would  deem  essential  for  high  and  important  judicial 
office ;  yet  they  will  all  sit  day  after  day  in  hearings  essentially 
judicial  in  their  nature  ruling  upon  difficult  controverted  ques- 
tions of  law  and  fact  of  vital  interest,  not  only  to  the  public 
but  to  the  102  corporations  regulated,  and  their  rulings  upon 
the  admissibility  and  credibility  of  testimony  as  well  as  upon 
all  inferences  warranted  by  the  evidence  and  their  findings  and 
conclusions  of  fact  will  be  practically  conclusive. 

We  must  concede,  of  course,  that  it  is  extremely  difficult  to 
induce  competent,  trained  and  experienced  experts  to  serve  on 
such  commissions  and  that  we  have  not  yet  devised  a  civil 


PUBLIC   SERVICE   COMMISSIONS  359 

service  system  which  will  invite  men  of  first-class  ability  to 
make  their  life  careers  in  the  permanent  public  service,  as  in 
Europe  and  British  India.  How  we  shall  bring  this  about  is 
the  great  problem  of  government  facing  us  to-day. 

President  Lowell  of  Harvard  in  his  lectures  on  "Public 
Opinion  and  Popular  Government"  urges  the  recognition  of 
the  imperative  necessity  of  having  experts  in  our  government 
service,  national  and  state.  He  says  that  we  are  now  training 
men  for  all  professional  work  except  that  of  the  government. 
Speaking  of  administrative  offices,  he  points  out  that  "they 
require  quite  as  great  skill  as  many  positions  in  private  employ 
to  which  one  would  not  think  of  appointing  an  untrained  man," 
and  that  we  are  "intrusting  such  duties  to  a  periodically  shift- 
ing body  of  officials  drawn  for  political  motives  from  an  inex- 
perienced public."  He  adds  that  "in  many  branches  of  the 
public  service,  central  and  local,  we  have  no  experts  at  all,  no 
permanent  officials  playing  an  important  part  in  the  adminis- 
tration, and  that  even  in  those  matters  .  .  .  where  experts  are 
regularly  employed  we  rarely  allow  men  to  remain  in  office 
long  enough  to  acquire  that  familiarity  with  their  peculiar 
problems  which  confers  efficiency  and  authority."  He  de- 
clares that  "the  United  States  is  the  only  great  nation  with  a 
popular  government  to-day  which  has  not  permanent  officers 
of  that  kind,"  and  that  "it  is  they  who  keep  the  machinery  of 
government  elsewhere  in  efficient  working  order." 

And  President  Goodnow  of  the  Johns  Hopkins  University  in 
his  work  on  "Politics  and  Administration"  also  urges  the  im- 
perative necessity  for  experts  with  special  knowledge  and  train- 
ing. Although  he  doubts  that  the  securing  of  experts  in  the 
higher  posts  of  public  service  can  be  accomplished  by  any 
changes  in  the  law,  he  nevertheless  believes  that  this  will  be 
brought  about  through  the  appointing  power  when  an  educated 
and  intelligent  public  opinion  shall  demand  it. 

We  lawyers  might  do  much  to  educate  public  opinion  in  this 
respect.  We  are  better  qualified  to  lead  in  these  matters  than 


360  PUBLIC   SERVICE   COMMISSIONS 

any  other  class.  We  have  stood  altogether  too  much  aloof  from 
these  public  problems.  Commissioner  Whitney  may  be  justi- 
'fied  in  complaining,  as  I  am  informed  he  recently  did,  of  the 
failure  of  the  bar  of  the  City  of  New  York  to  help  the  Public 
Service  Commission  with  constructive  suggestions.  A  joint 
committee  of  the  bar  associations  of  the  state  would  render  a 
great  public  service  by  making  a  thorough,  impartial,  and  ex- 
haustive investigation  of  this  whole  problem  of  public  service 
commissions  and  pointing  out  the  crying  need  for  experts  in  our 
public  service.  This  is  a  task  worthy  of  our  profession  and  one 
which  would  enable  it  to  render  a  great  and  patriotic  service  to 
the  nation  and  the  state.  Progress  and  efficiency  in  the  future, 
as  our  conditions  become  more  and  more  complex,  will  only  be 
found  in  the  advice  and  direction  of  men  qualified  by  study 
and  experience  to  advise  and  point  out  the  way,  and  certainly 
not  in  the  haphazard  experiments  with  which  our  representa- 
tives in  public  office  are  now  groping  and  blundering. 

But,  in  the  meantime,  as  at  present  the  difficulty  of  securing 
public  service  commissioners  who  are  really  experts  and  who 
have  special  knowledge  of  the  particular  businesses  to  be  regu- 
lated seems  to  be  almost  insuperable,  should  we  not  limit  the 
powers  of  these  commissioners  to  simpler  tasks  and  duties,  such 
as  they  can  be  reasonably  expected  to  perform  for  the  protec- 
tion and  benefit  of  the  public  ?  If  the  jurisdiction  of  our  public 
service  commissions  were  now  limited  to  fewer  matters  and  the 
commissions  were  made  strictly  administrative  bodies  without 
judicial  powers,  they  would  be  able  to  render  much  more 
effective,  valuable  and  satisfactory  service  to  the  public  than 
is  now  possible.  Mr.  Coleman,  after  more  than  eight  years  of 
exceptional  opportunities  for  observation  and  study,  has  indi- 
cated the  true  lines  to  follow,  that  is,  to  limit  the  powers  and 
efforts  of  the  present  commissions  to  two  fundamental  objects, 
namely,  securing  safe  and  adequate  service  and  just  and  reason- 
able rates.  These  two  objects  are  sufficient  to  keep  any  com- 


PUBLIC   SERVICE   COMMISSIONS  361 

mission  busy.  All  collateral  matters,  including  problems  of 
corporate  finance,  should  be  excluded,  or  vested  in  separate 
bodies,  even  though  these  collateral  matters  constitute  ele- 
ments indirectly  affecting  service  or  rates.  For  example,  the 
actual  or  nominal  capitalization  of  a  corporation  need  have  no 
relation  to  what  ought  to  be  the  controlling  question  of  the 
actual  value  of  property  devoted  to  a  public  use  or  the  actual 
cost  of  construction  or  duplication.  Why  then  waste  day  after 
day  in  taking  testimony  as  to  discounts  on  securities,  market 
rates  of  interest,  profits  of  promoters,  and  other  financial  details  ? 
A  reasonable  rate  of  charge  —  reasonable  for  the  public  as  well 
as  for  the  owner  of  the  utility  —  can  be  determined  without 
litigating  these  collateral  issues. 

Firmly  believing  that  what  we  need  in  our  public  service 
commissioners  is  less  of  the  judge  and  more  of  the  expert,  I 
want  to  emphasize  particularly  that  public  service  commissions 
should  not  be  permitted  to  exercise  judicial  power.  These 
bodies  are  not  constituted  for  the  due  and  impartial  perform- 
ance of  such  duties.  The  elimination  of  judicial  power  would 
not  impair  the  practical  usefulness  or  efficiency  of  the  commis- 
sions. On  the  contrary,  in  my  judgment,  both  the  Interstate 
Commerce  Commission  and  the  commissions  of  the  several 
states  would  accomplish  more  than  they  are  now  accomplishing 
and  render  better  and  more  efficient  service  to  the  public  if 
they  did  not  exercise  judicial  powers  and  did  not  act  at  the 
same  time  as  party,  prosecutor  and  judge  in  so  many  cases 
before  them. 

A  single  commission  cannot  properly  discharge  administra- 
tive and  judicial  duties  at  the  same  time,  and  our  commis- 
sioners are  generally  not  qualified  to  exercise  judicial  powers. 
Commissioner  Prouty's  remarks  as  to  the  Interstate  Com- 
merce Commission  apply  equally  to  our  public  service  com- 
missions, as  every  lawyer  who  has  appeared  before  them  must 
have  realized.  In  the  zealous  performance  of  their  executive 


362  PUBLIC  SERVICE   COMMISSIONS 

duties,  in  their  championing  of  the  interests  of  the  public, 
which  they  properly  feel  are  especially  confided  to  their  care, 
in  the  prosecution  of  complaints  instituted  by  themselves,  in 
their  natural  endeavor  to  establish  the  correctness  of  their  own 
preconceived  and  frequently  predeclared  views  and  policies, 
they  become  unfit  for  the  dispassionate  performance  of  judicial 
functions,  and  they  therefore  inevitably  deny  to  parties  before 
them  the  fair  trial  before  an  impartial,  unbiased  and  competent 
tribunal  to  which  every  one  —  every  class  in  the  community  — 
should  be  entitled  as  of  absolute  legal  right.  Such  commis- 
sions ought  to  have  no  concern  but  the  public  good  and  no 
personal  interest  in  the  questions  before  them ;  but  at  present 
they  are  placed  in  the  false  position  of  being  litigants  fighting 
for  their  own  advantage  or  for  their  own  views  or  policies. 

Under  the  existing  system,  in  many  instances  the  sitting 
commissioner  or  the  commission  itself  necessarily  becomes 
what  an  English  writer  has  called  "that  judicial  monster,  a 
judge  in  his  own  cause."  In  nearly  all  controversies  before 
the  commissions,  on  one  side  will  be  found  their  own  employees 
and  counsel  as  the  prosecutors  or  adversaries  of  those  whose 
property  rights  may  be  materially  affected,  if  not  ruined,  by  the 
decision.  Constituted  as  humanity  is,  the  commissioners  must 
be  unconsciously  biased  in  favor  of  their  own  associates  and 
subordinates.  Frequently,  if  my  information  be  accurate  and 
I  believe  it  is,  the  commissioners,  federal  and  state,  sitting  as 
judges  direct  the  preparation  of  the  evidence  to  be  adduced 
before  them  and  privately  confer  in  regard  to  the  particular 
case  or  complaint  in  hand,  not  only  with  their  own  associate 
or  subordinate  appearing  before  them  as  counsel  for  the  com- 
mission but  with  their  own  employees  who  are  to  testify  as 
witnesses.  The  commissioners  and  their  employees  necessarily 
become  partisans.  The  whole  atmosphere  is  the  negative  of 
what  a  court  of  justice  ought  to  be.  Under  such  circumstances, 
it  is  simply  preposterous  to  expect  in  cases  or  complaints  or 
hearings  before  commissions  that  impartiality,  open-minded- 


PUBLIC   SERVICE   COMMISSIONS  363 

ness,  disinterestedness  and  sound  judgment  which  are  indis- 
pensable in  a  judge  and  essential  to  evenhanded  and  unbiased 
justice  as  we  lawyers  understand  that  term. 

It  cannot  well  be  denied  that  the  Interstate  Commerce 
Commission  and  other  public  service  commissions  are  constantly 
exercising  judicial  powers,  and  that  there  is  seldom  any  effec- 
tive judicial  review  of  their  rulings.  The  essential  nature  of 
their  acts  of  power  is  not,  of  course,  to  be  changed  by  calling 
them  quasi-judicial  or  by  any  other  nomenclature.  The  power 
to  hear  evidence  and  decide  a  controverted  question  of  fact  is 
a  judicial  function  just  as  much  as  the  power  to  decide  a  ques- 
tion of  statutory  construction  or  other  question  of  law.  In 
the  recent  Federal  Trade  Commission  Act 1  it  is  expressly  pro- 
vided that  "the  findings  of  the  Commission  as  to  the  facts,  if 
supported  by  testimony,  shall  be  conclusive,"  thus  practically 
withdrawing  such  decisions  from  judicial  review.  The  theory 
upon  which  this  exercise  of  judicial  power  is  being  allowed 
under  the  Federal  Constitution,  which  separates  the  judicial 
from  the  legislative  and  executive  powers,  is  that  performance 
of  judicial  duties  may  be  vested  in  executive  or  administrative 
officers  where  such  power  is  merely  incidental  to  the  execution 
of  functions  peculiarly  administrative. 

The  Supreme  Court  has,  it  is  true,  gone  very  far  in  uphold- 
ing such  grants  of  judicial  power  to  administrative  bureaus,  as 
notably  in  the  Fraud  Order  and  the  Chinese  Exclusion  cases. 
The  present  rule,  as  it  seems  to  me,  must  ultimately  be  limited 
along  the  lines  indicated  in  the  dissenting  opinion  of  Justices 
Brewer  and  Peckham  in  the  Ju  Toy  case,2  because  it  will  sooner 
or  later  become  intolerable  that  administrative  officers  should 
be  vested  with  essentially  arbitrary  and  autocratic  powers  in 
respect  of  disputed  questions  of  fact  affecting  the  personal  and 
property  rights  of  individuals.  I  profoundly  believe,  with  all 
deference  to  the  court,  that  the  spirit  of  the  Constitution  is 

i  38  U.  S.  Stat.  at  Large,  717. 

»  U.  S.  v.  Ju  Toy,  198  U.  S.  253;  1905. 


364  PUBLIC   SERVICE   COMMISSIONS 

being  violated  in  the  exercise  by  the  Interstate  Commerce  Com- 
mission of  much  of  its  judicial  power,  and  that  this  is  equally 
true  of  other  departments  of  the  national  government.  The 
Supreme  Court  has  held  that  the  findings  of  fact  of  the  Inter- 
state Commerce  Commission,  if  supported  by  evidence,  are 
conclusive  and  cannot  be  reviewed  by  the  courts.  It  results 
from  this  ruling  that  in  many  of  the  proceedings  before  the 
commission,  where  every  element  of  a  judicial  proceeding  will 
be  found  and  where  the  commissioners  are  clearly  acting 
as  judges  and  exercising  judicial  power,  the  decision  of  the 
commission  becomes  a  practical  finality,  to  use  Commissioner 
Prouty's  expression,  and  parties  are  frequently  denied  any  fair 
review  before  a  court  of  justice  of  the  ruling  or  decision  of  the 
commission.  In  other  words,  the  very  evils  are  being  repro- 
duced which  were  sought  to  be  prevented  in  framing  the  Federal 
Constitution  by  adopting  the  principle  of  English  constitutional 
law  obtaining  in  the  seventeenth  and  eighteenth  centuries  that 
judicial  power  should  be  exercised  only  by  judges  learned  in 
the  law  whose  term  of  office  should  be  during  good  behavior 
and  who  would  for  that  reason  be  more  likely  to  feel  independ- 
ent of  the  executive. 

It  is  true  that  it  has  for  many  years  been  the  settled  rule  of 
constitutional  law  that  the  ultimate  finding  or  ruling  of  a  com- 
mission, whether  federal  or  state,  for  example,  as  to  the  suffi- 
ciency of  particular  rates,  could  not  be  made  conclusive.  The 
same  result,  however,  is  being  in  many  instances  allowed  to  be 
accomplished  indirectly  by  giving  a  practically  conclusive  effect 
to  the  findings  of  commissions  upon  controverted  questions  of 
fact  and  the  inferences  to  be  drawn  from  uncontradicted  evi- 
dence. A  rule  making  the  finding  of  fact  of  a  commission 
prima  facie  correct,  or  creating  a  rebuttable  presumption  in  its 
support  would  not,  of  course,  necessarily  or  unreasonably  preju- 
dice a  party,  for  it  would  operate  generally  no  further  than  to 
shift  the  affirmative  of  the  issue  and  the  burden  of  proof.  This 
would  frequently  be  no  more  than  a  matter  of  the  order  of 


PUBLIC   SERVICE   COMMISSIONS  365 

testimony  or  procedure.  We  can  ordinarily  acquiesce  in  a  rule 
by  which  appellate  courts  shall  not  review  the  conclusions  of 
fact  or  conflicts  in  testimony  in  the  lower  courts,  because  in 
such  cases  we  have  had  at  least  our  one  day  in  a  court  of  jus- 
tice proceeding  according  to  those  long-established  rules  and 
safeguards  of  evidence  which  we  believe  to  be  essential  for  the 
ascertainment  of  the  truth,  the  protection  of  individual  rights, 
and  the  impartial  and  competent  administration  of  justice. 
In  this  state,1  by  virtue  of  our  Code  of  Civil  Procedure  (sec- 
tion 2140),  the  findings  or  conclusions  of  fact  of  our  public 
service  commissions  must  be  given  as  much  force  and  effect 
as  the  verdict  of  a  jury  after  a  judicial  trial. 

If,  therefore,  the  findings  or  conclusions  of  fact  of  adminis- 
trative boards  are  not  to  be  susceptible  of  full  review  by  the 
courts,  and  if  they  are  to  be  made  practically  conclusive  when- 
ever there  is  any  evidence  to  support  them,  there  will  then  be 
in  the  majority  of  cases  a  complete  denial  of  any  fair  trial  in 
a  court  of  justice  as  much  as  if  the  ultimate  ruling  or  decision 
of  the  commission  were  also  made  conclusive.  It  is,  of  course, 
well  known  that  many,  if  not  most,  of  the  cases  before  these 
commission  tribunals  depend  in  final  analysis  upon  the  facts, 
and  that,  if  the  facts  are  not  to  be  reviewable  in  the  courts, 
the  decisions  of  the  commissions  will  in  such  cases  become 
final.  This  will  become  more  and  more  the  practical  result 
as  the  statutes  are  authoritatively  interpreted  by  the  courts 
and  all  questions  of  mere  legal  power  and  procedure  definitely 
settled. 

The  doctrine  that  all  findings  of  fact  of  an  administrative 
commission  are  to  be  treated  as  sacrosanct  is  in  many  respects 
both  absurd  and  dangerous.  Indeed,  it  seems  to  me  that  it 
was  a  mistake  to  permit  any  departure  from  the  principle  of 
constitutional  law  denying  the  power  to  give  conclusive  effect 
to  the  findings  of  commissions.  An  aggrieved  party  should 
have  at  least  one  day  in  court,  and,  when  appealing  to  a  court 

i  New  York. 


366  PUBLIC   SERVICE   COMMISSIONS 

of  original  jurisdiction  for  justice,  should  not  be  prejudiced  or 
handicapped  by  any  findings  or  conclusive  presumptions, 
whether  of  fact  or  law,  against  his  contentions  in  that  court. 
Otherwise,  we  shall  have  no  real  judicial  protection  against 
arbitrary  and  unjust  action  by  commissions. 

The  power  to  determine  conclusively  all  controverted  ques- 
tions of  fact  now  vested  in  these  bodies  has  undoubtedly  im- 
pelled the  courts  generally  to  hold  the  commissions  to  the  most 
technical  rules  of  law  affecting  the  rights  of  parties  and  to  re- 
quire competent  proof  of  all  the  facts  necessary  to  be  proved  in 
order  to  authorize  the  making  of  a  determination.  The  result 
is  that  the  conduct  of  proceedings  before  these  commissions  is 
becoming  more  and  more  technical  and  formal ;  administrative 
efficiency  is  thereby  being  cramped  and  diminished,  if  not  fre- 
quently paralyzed,  and  procedure  is  beginning  to  receive  even 
more  attention  than  matters  of  substance  and  the  merits.  As 
Mr.  Coleman  put  it,  procedure  in  this  administrative  field  is 
full  of  pitfalls,  trenches  and  barbed  wire.  Every  order  of  a 
commission  must  be  supported  by  findings  of  fact  ascertained 
and  proved  by  competent  evidence  in  each  particular  proceed- 
ing as  it  affects  the  party  regulated  and  contesting.  The 
statutory  provision  generally  inserted  that  these  tribunals 
shall  not  be  bound  by  the  technical  rules  of  evidence,  I  venture 
to  say,  has  only  complicated  the  performance  of  their  duties 
and  has  been  of  little  practical  help,  for  legal  evidence  must 
still  be  adduced  in  order  to  support  any  finding.  Professor 
Wyman  has  said  that  "the  more  liberal  the  practice  in  admit- 
ting testimony,  the  more  imperative  the  obligation  to  preserve 
those  essentials  of  action  in  accordance  with  evidence  adduced 
by  which  rights  have  immemorially  been  asserted  or  defended." 
The  commissioners  may  have  the  most  accurate  expert  and 
special  knowledge  of  the  situation  presented  by  the  case  or 
complaint  then  before  them ;  they  may  have  a  few  weeks  before 
concluded  a  thorough  investigation  of  the  subject  in  all  its 
aspects  and  at  great  expense  and  delay;  they  may  know  all 


PUBLIC   SERVICE   COMMISSIONS  367 

the  material  facts  with  reasonable  certainty;  prompt  action 
may  be  advisable  and  they  may  be  fully  prepared  to  act ;  but 
they  must  nevertheless  in  each  case  proceed  anew  to  hear  and 
consider  and  rule  upon  every  particle  of  evidence  relevant  or 
irrelevant  which  counsel  may  offer  to  adduce.  Hence  the  great 
mass  of  information  which  the  commission  is  laboriously  accu- 
mulating year  after  year  is  not  available  to  it  as  evidence  upon 
which  to  base  an  order  in  any  contested  case  in  hand. 

On  the  other  hand,  if  the  commissions  were  not  exercising 
judicial  powers,  they  would  have  far  greater  liberty  and  facility 
of  action.  They  could  then  be  safely  constituted  entirely  of 
experts,  and  they  could  be  charged  with  the  sole  duty  of  ac- 
quiring special  and  accurate  knowledge  as  to  all  so-called  public 
utilities  and  of  formulating  rules  as  to  public  safety  and  con- 
venience, as  to  public  service,  and  as  to  rates  of  charge,  which 
rules  could  be  made  prima  facie  correct  and  binding,  with 
liberty  to  the  corporation  or  individual  affected  to  challenge 
them  as  unreasonable  and  to  test  that  issue  in  the  courts.  Full 
powers  of  investigation  should  be  continued  so  that  the  com- 
missioners may  thereby  readily  acquire  the  special  knowledge 
they  need.  The  commissioners  or  their  subordinates  should 
continue  at  liberty  to  make  informal  investigations  and  to  avail 
of  any  information  they  have,  and  base  rulings  thereon  after 
notice  to  the  party  affected  and  a  concise  statement  of  the 
grounds  upon  which  they  are  proceeding.  Any  one  affected 
should  be  compellable  and  should  have  the  right  to  furnish  in- 
formation on  any  such  investigation,  but  should  not  be  entitled 
to  a  formal  judicial  hearing  before  the  commission  with  the 
technical  procedure  and  competent  evidence  that  that  always 
implies. 

Although  the  principle  of  the  separation  of  governmental 
powers  was  long  observed  in  this  country  in  its  integrity  and  is 
still  generally  recognized  as  a  sound  governmental  policy,  we 
must  perceive  that  it  is  being  gradually  undermined  in  national 
and  state  affairs.  The  constitutional  rule  as  to  the  federal 


368  PUBLIC   SERVICE   COMMISSIONS 

government  is  different  from  the  rule  obtaining  in  some  of  the 
states, — for  example,  in  this  state.  The  Federal  Constitution 
separates  the  judicial  power  by  expressly  vesting  it  in  courts 
of  justice  constituted  of  judges  appointed  during  good  behavior, 
and  if  that  provision  be  followed  according  to  its  intent  and 
spirit,  the  separation  will  be  maintained.  The  New  York 
state  constitution,  however,  does  not  separate  the  judicial 
power  from  the  other  branches  of  government,  and  therefore 
in  this  state  administrative  boards  may  be  vested  with  the 
fullest  and  broadest  judicial  powers;  and  their  rulings,  even 
on  questions  of  law,  may  be  made  final  and  conclusive  without 
any  right  of  appeal  to  the  courts.  The  Supreme  Court  of  the 
United  States  has  declared  that  neither  the  fourteenth  amend- 
ment nor  any  other  provision  of  the  Federal  Constitution  for- 
bids a  state  from  granting  to  an  administrative  body  the  final 
determination  of  questions  of  law  or  of  fact,  and  all  that  is 
necessary  is  to  afford  a  hearing  before  final  determination. 

It  is  interesting  to  note  that  the  same  tendency  to  invest 
administrative  boards  with  judicial  powers  and  to  supersede 
and  undermine  the  law  courts  by  bureaucracy  has  also  been 
developing  in  England  and,  notwithstanding  the  supremacy  of 
Parliament,  is  being  challenged  there  as  involving  a  grave 
menace  to  the  principle  of  the  supremacy  of  the  law  and  to  the 
rights  of  the  individual.  The  Master  of  the  Rolls,  Sir  H.  H. 
Cozens-Hardy,  in  a  speech  at  the  Guildhall  banquet  of  Novem- 
ber 9,  1911,  referred  to  the  tendency  in  recent  years  to  remove 
from  the  courts  matters  which  properly  belonged  to  them,  and 
to  intrust  them  to  government  departments,  and  he  solemnly 
expressed  the  view  that  this  was  a  great  mistake.  The  British 
Constitution  Association  has  issued  a  protest  against  this  prac- 
tice, characterizing  it  as  vicious  and  insisting  that  bureau- 
cratic decisions  are  certain  to  be  biased  and  unscientific.  Many 
lawyers  in  England  declare  that  trials  before  such  tribunals  are 
a  denial  of  the  fundamental  right  or  privilege  of  a  fair  trial 


PUBLIC  SERVICE   COMMISSIONS  369 

before  competent  and  impartial  judges  guaranteed  to  English- 
men by  Magna  Carta. 

The  bureaucratic  development  in  England  and  the  tendency 
to  withdraw  from  the  courts  matters  essentially  proper  for 
judicial  review  and  protection  coincide  closely  in  time  with  our 
own  development  of  administrative  bureaus.  The  encroach- 
ment of  the  administrative  on  the  judicial  department  there  is 
to  be  traced  back  to  a  section  in  the  Public  Health  Act  of  1875. 
This  section  had  to  do  with  sewage  and  drainage,  and  it  pro- 
vided that  any  person  feeling  himself  aggrieved  by  any  assess- 
ment might  address  a  memorial  to  the  local  government  board, 
and  that  any  order  made  by  this  board  should  be  binding  and 
conclusive  on  all  parties.  This  provision  of  the  Public  Health 
Act  was  the  parent  and  prototype  of  all  the  statutory  inroads 
that  have  since  been  made  on  the  powers  of  the  law  courts  in 
England.  It  was  reproduced  almost  verbatim  in  the  Educa- 
tion Act  of  1902,  which  virtually  placed  the  children  of  Eng- 
land under  the  absolute  control  of  a  governmental  bureau.  An 
extreme  example  of  the  encroachment  of  the  administrative 
upon  the  judicial  department  in  England  will  be  found  in  the 
National  Insurance  Act  of  1911.  This  statute  places  the  inde- 
pendence and  happiness  of  the  poorer  classes  in  many  respects 
within  the  power  of  a  bureaucratic  organization  without  any 
right  of  appeal  to  the  courts. 

In  writing  the  introduction  to  the  latest  edition  of  his  "Law 
of  the  Constitution/' 1  published  last  year,  Professor  Dicey,  the 
great  English  authority  on  constitutional  law,  took  occasion 
to  deprecate  the  growth  of  bureaucracy  in  England  and  the 
decay  of  the  great  English  principle  of  the  rule  of  law  adminis- 
tered by  courts  of  justice.  He  compares  the  development  in 
England  with  that  of  France.  He  shows  that  whereas  in  Eng- 
land the  recent  development,  contrary  to  all  constitutional 
precedent,  has  been  away  from  judicial  control  towards  an 
arbitrary  bureaucracy,  in  France  just  the  opposite  development 

i  1915. 
2B 


370  PUBLIC  SERVICE   COMMISSIONS 

has  been  taking  place.  There  the  tendency  has  been  to  check 
and  control  the  bureaucracy  by  means  of  responsible  judicial 
bodies  which  protect  individual  rights  against  the  encroach- 
ments of  administrative  officials.  Dicey  says:  "And  it  may 
not  be  an  exaggeration  to  say  that  in  some  directions  the  law 
of  England  is  being  'officialized/  if  the  expression  may  be 
allowed,  by  statutes  passed  under  the  influence  of  socialistic 
ideas.  It  is  even  more  certain  that  the  droit  admin  i^tratif  of 
France  is  year  by  year  becoming  more  and  more  judicialized." 
Thus,  in  England,  as  in  America,  the  people  are  drifting  from 
the  courts  of  justice  as  the  bulwark  of  their  liberties  and  the 
only  fit  instruments  for  curbing  executive  tyranny,  and  are 
placing  arbitrary  and  autocratic  powers  in  the  hands  of  adminis- 
trative officials  generally  untrained  in  the  law  and  uncontrolled 
and  unchecked  by  judicial  review. 

Those  who  advocate  conferring  judicial  powers  on  these 
public  service  commissions  without  right  of  review  in  the  courts 
frequently  refer  to  the  efficient  French  administrative  depart- 
ments and  the  so-called  French  administrative  courts  as  an 
example  of  what  may  be  accomplished  by  administrative  offi- 
cials. It  is  said  that  in  France  the  courts  are  not  allowed  to 
interfere  with  administration,  and  that  there  the  individual  is 
afforded  no  right  to  question  in  courts  of  justice  the  orders  or 
acts  of  administrative  bodies.  Unfortunately,  for  the  purposes 
of  this  argument,  the  statement  is  not  strictly  accurate.  Al- 
though the  famous  act  of  1790  prohibiting  the  ordinary  courts 
from  interfering  with  administrative  officials  is  still  in  force, 
there  is  nevertheless  an  appeal  from  administrative  officials  to 
the  French  Council  of  State,  the  highest  administrative  tribunal 
in  France,  and  the  Council  in  one  of  its  branches  is  now  organ- 
ized as  an  independent  court  of  justice  entirely  separate  from 
its  organization  as  an  administrative  body.  The  individual 
whose  rights  have  been  infringed  by  an  administrative  official 
may  carry  his  alleged  grievance  to  the  Council  of  State  as  the 


PUBLIC  SERVICE  COMMISSIONS  371 

court  of  last  resort,  and  thus  get  a  final  review  of  his  case  by  a 
judicial  body  acting  according  to  orderly  judicial  procedure  and 
reasoned  judgment,  based  on  established  rules  and  precedents. 
Most  of  the  progress  made  by  the  French  towards  judicial 
review  of  the  acts  of  administrative  officials  has  taken  place 
under  the  Third  Republic.  It  was  by  the  law  of  May  24,  1872, 
that  the  Council  of  State  was  given  its  character  as  an  inde- 
pendent court  of  law,  and  that  the  present  Conflict  Court  was 
created.  The  Council  of  State  has  since  then  been  so  liberal 
in  finding  grounds  to  protect  the  rights  of  individuals  and  in 
checking  or  restraining  any  arbitrary,  oppressive,  or  unjust 
action  on  the  part  of  administrative  officials  that  to-day  the 
humblest  citizen  in  France,  at  a  trifling  expense,  may  judicially 
question  the  act  of  any  administrative  or  executive  official, 
from  a  constable  to  the  president  of  the  Republic.  In  the  pro- 
tection of  individual  rights  the  French  Council  of  State  has 
repeatedly  annulled  acts  and  orders  of  the  highest  governmental 
departments  and  even  of  the  president  himself.  Under  the 
administrative  system  as  now  developed  in  France,  the  private 
citizen  has  probably  a  greater  measure  of  protection  by  judicial 
bodies  against  arbitrary,  unjust,  or  illegal  acts  of  government 
officials  than  in  any  other  country.  In  a  word,  since  1872, 
the  whole  tendency  in  France  has  been  toward  judicial  control. 
The  use  of  the  word  "administrative"  is  apt  to  mislead  us. 
Though  in  their  origin  the  present  French  administrative  courts 
were  strictly  administrative  bodies,  to-day  they  are  truly  courts 
of  justice,  offering  all  the  guaranties  afforded  by  fixed  rules  of 
law  enforced  by  learned,  impartial  and  independent  judges. 
The  people  now  look  with  confidence  to  these  tribunals  for  the 
protection  of  their  legal  rights  and  regard  them  as  essentially 
judicial.  It  has  been  found  in  France,  as  it  will  be  ultimately 
found  with  us,  that  private  rights  can  be  afforded  full  protec- 
tion under  the  rule  of  law  impartially  enforced  by  independent 
judicial  tribunals  without  unduly  interfering  with  or  hamper- 
ing administrative  efficiency. 


372  PUBLIC   SERVICE   COMMISSIONS 

I  find  it  impossible  within  the  limits  of  this  address  to  deal 
satisfactorily  or  comprehensively  with  such  a  large  and  im- 
portant subject  as  the  regulation  and  control  of  public  utilities 
by  means  of  administrative  commissions,  and  particularly  the 
aspect  of  judicial  review.  I  can  do  no  more  than  suggest  some 
points  for  reflection.  It  seems  to  me  that  the  theory  of  regu- 
lation by  commissions  is  inherently  sound.  Large  legislative 
bodies  such  as  Congress  or  our  state  legislatures  cannot  act  in 
these  matters  so  intelligently  and  competently  as  a  board  or 
commission  of  trained  experts.  The  people  at  large  must  be 
protected  against  those  who  are  engaged  in  certain  businesses 
in  which  the  public  is  interested  and  upon  which  the  public 
must  depend.  The  managers  of  these  concerns  generally  have 
it  within  their  power  to  oppress  the  public  and  make  a  prey  of 
their  necessities.  But  it  should  be  recognized  that  such  bodies 
as  these  commissions  are  not  fitted  or  qualified  by  training  or 
temperament  for  the  exercise  of  judicial  power.  The  corpora- 
tions and  individuals  whose  businesses  are  regulated,  whose  earn- 
ing capacity  may  be  destroyed,  or  whose  property  may  be  prac- 
tically confiscated  by  unwise  and  unjust  regulation,  ought  to 
have  a  day  in  court  as  of  right  before  an  impartial  judicial  tri- 
bunal composed  of  men  learned  in  the  law  and  bound  to  decree 
justice  according  to  law.  If  this  involves  delay  and  expense,  it 
is  far  better  to  submit  to  that  inconvenience  than  to  withdraw 
the  protection  of  the  law  from  any  class  in  the  community. 
The  example  or  precedent  is  altogether  too  dangerous.  Neither 
expedition  nor  economy  has  resulted  or  ever  will  result  in  the 
long  run  from  disregarding  fundamentals  and  confusing  powers 
which  in  their  nature  and  in  their  proper  exercise  are  radically 
different  and  require  different  treatment  and  different  points 
of  view. 

I  am  not  prepared  to  say  that  it  would  be  wise  or  unwise  to 
create  special  courts  similar  to  the  French  administrative  courts, 
or  our  Court  of  Claims,  or  the  ill-fated  and  short-lived  Federal 
Commerce  Court.  I  recognize  also  that  it  is  by  no  means 


PUBLIC  SERVICE  COMMISSIONS  373 

certain  that  the  ordinary  law  courts  are  in  all  cases  the  best 
bodies  for  adjudicating  upon  the  errors  or  abuses  of  adminis- 
trative bureaus.  Some  exceptions  may  be  necessary.  How- 
ever, generally  speaking,  my  own  view  is  that  it  would  be 
better  and  more  satisfactory  to  afford  full  review  of  all  essen- 
tially judicial  questions  in  our  regular  courts,  in  view  of  their 
learning  and  training,  their  long-established  prestige,  and  their 
moral  authority.  We  might  well  create  special  divisions  of 
such  courts  to  hear  and  determine  controversies  relating  to 
orders  or  regulations  of  our  public  service  commissions.  For 
example,  our  Court  of  Claims  would  probably  be  a  more  satis- 
factory tribunal  if  it  were  composed  of  Supreme  Court  justices 
and  were  organized  as  a  branch  or  division  of  that  court.  A 
study  of  the  decisions  of  our  ordinary  superior  courts,  federal 
and  state,  in  cases  involving  the  most  complicated  problems 
ever  submitted  to  commissions,  such  as  the  Minnesota  and 
Missouri  Rate  Cases  1  and  People  ex  rel.  Kings  Co.  Lighting  Co. 
v.  Willcox,2  must  convince  us  that  they  are  fully  competent 
to  deal  with  all  judicial  questions  likely  to  arise  from  time  to 
time  in  the  administration  of  federal  and  state  commission 
laws.  In  most  cases  much  more  expedition  and  economy  would 
be  secured  if  long  and  formal  hearings  before  commissions  were 
dispensed  with  and  if  controverted  issues  about  to  be  litigated 
were  at  the  outset  taken  into  a  court  of  justice.  A  plain  and 
concise  statement  of  the  grounds  upon  which  an  order  of  a  com- 
mission has  been  based  ought  to  be  sufficient  to  enable  the 
courts  to  test  the  contention  of  the  individuals  or  corporations 
affected  that  such  order  is  unreasonable  or  illegal. 

Finally,  I  venture  to  predict  that  the  continuance  of  the 
present  tendency  towards  vesting  judicial  power  in  these  ad- 
ministrative bureaus,  unless  checked,  will  defeat  the  whole 
experiment  of  public  service  commissions.  The  "American 
people  will  not  long  be  content  with  having  their  rights  con- 
clusively determined  by  administrative  fiat,  but  will  inevitably 

*  230  U.  S.  352,  474 ;  1913.          8  210  N.  Y.  479 ;  1914. 


374  PUBLIC   SERVICE   COMMISSIONS 

turn  back  to  the  courts  of  justice  and  insist  upon  a  judicial 
trial,  with  its  guaranty  of  a  fair  hearing,  and  will  demand 
reasoned  judgment  consistently  applying  ascertained  general 
principles  and  precedents  and  excluding  official  discretion  with 
its  danger  of  action  dictated  by  caprice,  prejudice,  or  passion. 
We  will  not  permanently  tolerate  despotism  in  any  form,  how- 
ever temporarily  expedient  or  benevolent.  The  corresponding 
risk  of  ultimate  arbitrary  power  and  bureaucratic  tyranny  is 
altogether  too  great.  In  the  last  analysis,  the  survival  of  self- 
governing  democracies  and  what  our  fathers  termed  regulated 
liberty  will  depend,  as  English  and  American  history  ought 
surely  to  teach  us,  upon  the  separation  of  the  judicial  power  in 
nation  and  state  and  upon  its  freedom  from  executive  and 
political  control,  in  a  word,  upon  its  complete  independence, 
but  above  all,  if  I  may  recall  the  immortal  language  of  Magna 
Carta,  upon  its  exercise  only  by  judges  "such  as  know  the  law 
of  the  realm  and  mean  to  observe  it  well." 


INDEX 


American   Malt  Corporation,  reorgani- 
zation, 218 
Antitrust  Laws 

Clayton  Act.     See  Clayton  Act 
Federal  Trade  Commission  Act.     See 

Federal  Trade  Commission  Act 
Sherman  Law.     See    Sherman    Anti- 
trust Law 

Baltimore  &  Ohio  Railroad 
Mortgages,  5,  6,  8 
Reorganization,  177 

Bondholders'  Protective  Committees,  162 
Bonds 

Collateral  Trust  Indentures,  57 
Debenture  Indentures,  66 
Guaranties,  70 
Historical  Development,  1 
Income  bonds,  69 
Mortgage  Regulating  Issue,  27 
Protective  Committees,  162 
Stock  Exchange  Rules  as  to,  71 
Brewer,     Mr.     Justice;      extract    from 
opinion   in    Merchants    Loan   & 
Trust  Co.  v.  Chicago  Rys.  Co.,  190 
Buffington,  Judge;    extract  of  opinions 
on  Sherman  Antitrust  Law,  253, 
254,  255 

Bureau  of  Corporations;    reference   to, 
in  lecture  on  Federal  Trade  Com- 
mission, 312,  314 
Butler,   Judge;    extract  of  opinion    on 

Sherman  Anti-trust  Law,  241 
Byrne,  James ;  paper  by,  77-152 

Cases  Cited  or  Discussed.  See   Alpha- 
betical List  on  page  379 
Chicago   City  Railway  mortgage  dis- 
cussed, 33 
Clayton  Act 

Lecture  on,  by  Gilbert  H.  Montague, 

275-326 
Reference  to,  in  Lecture  on  Sherman 

Antitrust  Law,  273 
Violations;      procedure     of     Federal 

Trade  Commission  as  to,  322 
Coleman,  George  S. ;  paper  by,  327 
Collateral  Trust  Indentures,  13,  57 


Committees 

Protective;    bondholders'  and   stock- 
holders', 162 
Reorganization,  181 

Corporate  Bonds,  Mortgages,  Collateral 
Trusts  and  Debenture  Indentures  ; 
paper  by  Francis  Lynde  Stetson, 
1-76 
Corporations 

Dissolutions   under   Sherman   Anti- 
trust Law.     See  Sherman  Anti- 
trust Law 
Recapitalization  without    insolvency, 

224 

Reorganization  on  Insolvency 
With  new  Corporation,  156 
Without  new  Corporation,  209 
Cravath,  Paul  D. ;  paper  by,  153 
Cullen,     Chief     Judge;     extract    from 

opinion  in  Hoffer  v.  Britt,  349 
Cummins,  Senator ;  definition  of  "unfair 
methods  of  competition,"  316 

Debenture  Indentures,  6,  14,  66 
Dicey,  A.  V. ;  on  bureaucratic  develop- 
ment in  England,  369,  370 
on   the   French    droit    administratif, 
370,  371 

England 

Bureaucratic  development  in,  368-370 
Debenture  holders  in,  rights  of,  68 
Reorganization  of  corporations  in,  188 

Federal  Trade  Commission 

Powers  and  duties,  312-315,  319,  325 
Procedure  in  respect  of  "unfair  meth- 
ods of  competition,"  320-322 
Procedure  in  respect  of  violations  of 

Clayton  Act,  322 
Federal  Trade  Commission  Act 

Citation,   in    lecture    on    Sherman 

Antitrust  Law,  270,  271 
History,  275-281 

Section  5  :  discussion  on  phrase  "un- 
fair methods  of  competition,"  315- 
326 


375 


376 


INDEX 


Federal  Trade  Commission  Act  (con- 
tinued) 

Section  5  :  procedure  in  respect  of 
"unfair  methods  of  competi- 
tion," 320-322 

Federal  Trade  Commission  and  Clayton 
Act;  paper  by  Gilbert  H.  Mon- 
tague, 275-326 

Finch,  Judge;  extract  of  opinion  in 
Seymour  v.  Spring  Forest  Ceme- 
tery Association,  224 

Foreclosure  of  Railroad  Mortgages; 
paper  by  James  Byrne,  77-152 

Foreclosures 

of  Corporate  mortgages  generally,  153 
of  Railroad  mortgages,  77,  156 

French  administrative  departments,  ref- 
erence to,  370,  371 

Fuller,  Chief  Justice ;  extract  of  opinions 
on  Sherman  Antitrust  Law,  241, 
259 

Goodnow,  Frank  J. ;  on  the  need  of  ex- 
perts in  the  government  service, 
359 

Government,  growth  of  bureaucracy  in 

England  and  America,  368-370 
need  of  trained  experts  in,  347,  356- 
370,  372 

Gray,  Judge;  extract  of  opinion  on 
Public  Service  Commissions  Law, 
342 

Guaranteed  bonds,  70 

Guthrie,  William  D. ;  paper  on  Public 
Service  Commissions,  347-374 

Harlan,  Justice ;  extract  of  opinions  on 

Sherman  Antitrust  Law,  241,  242 
Harmon,  Attorney-General ;    report  to 

Congress  on   Sherman  Antitrust 

Law,  243 
Hoar,   Senator;    remarks  on   Sherman 

Antitrust  Law,  250 
Holding  Companies,  230 
Hollis,  Senator;  definition  of  "unfair 

methods  of  competition,"  317 
Holmes,  Justice ;  extract  of  opinions  on 

Sherman    Antitrust     Law,    250, 

251,  260 
Hook,   Judge;    extract  of  opinions  on 

Sherman  Antitrust  Law,  253,  256 
Hough,  Judge 

extract  of  opinion  in  Guaranty  Trust 

Co.  v.  Inter.   Type.  Mach.  Co., 

189 
extract  of  opinions  on  Clayton  Act, 

299,  302,  303 


Hudson  River  Railroad  mortgage,  2 
Hughes,  Governor ;  extract  from  address 
and  message  pertaining  to  Public 
Service    Commission,    327,    328, 
329 

Hughes,  Mr.  Justice;  extract  from  ad- 
dress before  State  Bar  Associa- 
tion, 356 

Income  bonds,  69 

Interstate  Commerce  Commission;  ref- 
erence to,  in  lecture  on  Public 
Service  Commissions,  349,  351, 
352,  354,  355,  357,  363,  364 

Interstate  Trade  Commission.  See  Fed- 
eral Trade  Commission 

Introductory  Note,  vii 

Judicial  Code  of  U.  S. ;  effect  on  fore- 
closure of  railroad  mortgages,  77, 
92 

Judiciary  threatened  in  England  and 
America  by  growth  of  bureau- 
cracy, 363-370 

Kahn,  Otto  H. ;   extract  from  article  in 

World's  Work,  357 
Kenna,1  Senator ;   remarks  in  debate  on 

Sherman  Antitrust  Law,  253 

Lacombe,  Judge 

extract  of  opinion  on  Clayton   Act, 

303 

extract  of  opinion  on  Sherman  Anti- 
trust Law,  267 
Lanning,  Judge 

extract  of  opinion  on  Sherman  Anti- 
trust Law,  249 

Lowell,  A.  Lawrence ;  on  need  of  ex- 
perts in  the  government  service, 
359 

Lumbering  Companies  mortgages,  30 
Lurton,  Judge 

extract  of  opinion  in  Central  Trust  Co. 
v.  Cincinnati  H.  &  D.  Ry.  Co., 
133 

extract  of  opinion  in  Horn  v.  Pere 
Marquette  R.  Co.,  91 

Massachusetts  trusts,  232 

Metropolitan  Traction  Company,  re- 
organization, 231 

Mining  Companies  mortgages,  30 

Mohawk  &  Hudson  Railroad  mortgage, 
2 

Montague,  Gilbert  H. ;  paper  by,  275- 
326 


INDEX 


377 


Mortgages 

Discussed 

Baltimore  &  Ohio  R.  R.,  5,  6,  8 
Chicago  City  Ry.,  33 
Erie  Railroad,  5,  7-10,  12 
Hudson  River  Railroad,  2 
Mohawk  &  Hudson  Railroad,  2 
N.  Y.  Central  Ry.,  33 
Northern  Pacific  Ry.,  12,  33 
Richmond  &  Danville  Railroad,  7 
Richmond  &  West  Point  Terminal 
Ry.  &  Warehouse  Co.,  12 

Foreclosure 

Corporate  generally,  153 
Protective  committees,  162 
Railroad,  77,  156 

Historical  development,  1 

of  Lumbering,   Mining  and  Trading 
Companies,  30 

Preparation,     conditions,     covenants 
and  execution,  27 

Nelson,  Mr.  Justice ;  extract  from 
opinion  in  Pennock  v.  Coe,  47 

Newlands,  Senator;  definition  of  "un- 
fair methods  of  competition,"  315 

New  York  &  Erie  Railroad  mortgages, 
5,  7-10,  12 

New  York  Central  Railroad  mortgage, 
33 

New  York  City 

Public  Service  Commission.     See  Pub- 
lic Service  Commission  (The) 
Rapid  Transit  Act.     See  Rapid  Transit 
Act 

New  York  Stock  Exchange 
Rules  as  to  bond  issues,  71 
Rules  as  to  protective  agents,  171 

Northern  Pacific  Railway,  mortgage,  12, 
33 

Noyes,  Judge;  extract  of  opinions  on 
Sherman  Antitrust  Law,  246, 
252,  266 

Old  Dominion  Copper  Company,  re- 
organization, 226,  227 

Papers  read 

by  Byrne,  James,  77 

by  Coleman,  George  S.,  327 

by  Cravath,  Paul  D.,  153 

by  Guthrie,  William  D.,  347 

by  Montague,  Gilbert  H.,  275 

by  Stetson,  Francis  Lynde,  1 

by  Wickersham,  George  W.,  235 

Peckham,  Justice ;  extract  of  opinion  on 
Sherman  Antitrust  Law,  245 


President  Wilson ;  extract  of  address  to 
Congress  on  Trade  Commission, 
276-277 

Protective  Committees,  162 
Prouty,    Commissioner;     extract    from 
address  of,  on  jurisdiction  of  In- 
terstate Commerce  Commission, 
355 

Public  Service  Commission  (The  N.  Y.) 
See  also  Public  Service  Commissions 
See    also    Public    Service     Commis- 
sions Law 
of  First  District, 
Jurisdiction,  333 
Organization,  departments,  etc. ,  335- 

336 

Method  of  work,  337-339 
Reference  to  personnel  of ,  in  lecture 
on  Public  Service  Commissions, 
357 
Jurisdiction  and  Powers 

of  First  District.     See  above 
Reference  to,  in  lecture  by  William 

D.  Guthrie,  353,  354,  355 
of  Second  District.     See  below 
Paper  on,  by  George  S.  Coleman,  327- 

346 

Reports  and  opinions,  339 
Review  of  decisions  of,  345 
of  Second  District 
Jurisdiction,  333 
Public  Service  Commissions 
Conditions  for  usefulness,  347 
Duties  of  commissioners ;    fewer  and 

simpler,  347-356,  360 
Judicial  powers,  361-374 
New  York  Public  Service  Commission. 

See  Public  Service  Commission 
Paper  on,    by  William   D.   Guthrie, 

347-374 
Qualifications  of  commissioners;    ex- 

pertness,  356-360 

Reference  to,  in  lecture  on  Reorgani- 
zation of  Corporations,  186,  187, 
189,  206 

Review,  of  rulings,  364-366 ;   373 
Public  Service  Commissions  Law 

See  also  Public   Service   Commission 
Construction ;  discussion  and  citation 
of  cases  tried  under  law,  339-345 
General  provisions,  330-332 
History,  327-330 
Object  of  Law,  332,  342 
Reference  to,  in  lecture  on  Reorgani- 
zation of  Corporations,  187 

Railroad  mortgages,  foreclosure,  77 


378 


INDEX 


Rapid  Transit  Act;  jurisdiction  of 
Public  Service  Commission  as  to, 
333-334 

Recapitalization,  224 
Receivers 

Corporations  generally,  157 
Railroads,  78,  91,  112 
Reorganization  of  Corporations ;   Bond- 
holders'   and   Stockholders'   Pro- 
tective   Committees ;     Reorgani- 
zation Committees  and  Voluntary 
Recapitalization ;   Paper  by  Paul 
D.  Cravath,  153-234 
Reorganizations 

Committees,  bondholders'  and  stock- 
holders', 181 
Discussed 

American  Malt  Corporation,  218 
Baltimore  &  Ohio  R.  R.,  177 
Metropolitan  Traction  Co.,  231 
U.  S.  Leather  Co.,  217 
U.  S.  Steel  Corporation,  230 
Wabash  Railroad,  177,  184 
Westinghouse     Manufacturing     & 

Electric  Co.,  220 
Income  bonds,  69 
in  Insolvency,  156,  208 
Recapitalization,  224 
Richmond  &  Danville  Railroad  mort- 
gage, 7 

Richmond  &  West  Point  Terminal  Rail- 
way &  Warehouse  Company 
mortgage,  12 

Robinson,  Senator ;  definition  of  "unfair 
methods  of  competition,"  316 

Saulsbury,  Senator ;  definition  of  "  unfair 

methods  of  competition,"  317 
Senate   Judiciary    Committee;     extract 

of  report  on  Clayton  Act,  300 
Sherman  Antitrust  Law 

Contents   as   originally   enacted,  ab- 
stract of,  240 

Criminal  Provisions  discussed,  272 
History  of  act,  235-239 
Objects  as  explained  in  debate,  237- 

239 
Paper  on ;  by  George  W.  Wickersham, 

235-274 

Stetson,  Francis  Lynde ;  paper  by,  1-76 
Stevens,    Congressman;    extract  of  mi- 
nority   report   on    Clayton  Act, 
280 

Stock  Exchange  Rules 
Bond  issues,  71 
Protective  agreements,  171 
Stockholders'  Protective  Committees,  162 


Storey,  Moorfield ;  extract  from  address 
to  American  Bar  Association,  189 

Strong,  Mr.  Justice ;  extract  from  opin- 
ion in  Jackson  v.  Ludeling,  47 

Taft,  Ex-President ;  extract  from  address 

referring  to  Clayton  Act,  299 
Taft,  Judge 

extract    of    opinion    in    Continental 

Trust  Co.  case,  83 
extract  of  opinion  in  Farmers  Loan  & 

Trust  Co. ».  Toledo  A.  A.  &  N.  M. 

Ry.  Co.,  128 

extract  of  opinion  on  Sherman  Anti- 
trust Law,  244 
Taney,    Chief     Justice;     extract     from 

opinion  in  Gue  v.  Canal  Co.,  47 
Tariff  Act,  Wilson ;  section  73  discussed, 

295,  296 
Trade   Commission   and   Clayton  Act ; 

paper  by  Gilbert   H.  Montague, 

275-326 

Trading  Companies  mortgages,  30 
Trustees;      provisions     concerning,     in 

mortgages,  40,  52,  55 

Unfair  methods  of  Competition.  For 
discussion  of  phrase  in  reference 
to  Federal  Trade  Commission  Act, 
see  Federal  Trade  Commission 
Act 

United  States  Judicial  Code.  See  Judi- 
cial Code  of  United  States 

United  States  Leather  Company,  re- 
organization, 217 

United  States  Steel  Corporation,  re- 
organization, 230 

Voting  Trusts,  208 

Wabash  Railroad ,  reorganization,  1 77 , 1 84 

Walsh,  Senator;  definition  of  "unfair 
methods  of  competition,"  317 

Westinghouse  Manufacturing  and  Elec- 
tric Company,  reorganization,  220 

White,  Chief  Justice ;  extract  of  opinion 
on  Sherman  Antitrust  Law,  254 

Wickersham,  George  W ;  paper  by,  235- 
274 

Williams,  Senator;  definition  of  "un- 
fair methods  of  competition,"  317 

Wilson,  President;  extract  of  address 
to  Congress  on  Trade  Commission, 
276-277 

Wilson  Tariff  Act ;  section  73  discussed, 
295,  296 

Wyman,  Bruce ;  on  public  service  com- 
missions, 366 


CASES  CITED  OR  DISCUSSED 


Listed  under  both  title  of  plaintiff  and  defendant.  Cases  in  Federal  Courts 
are  given  under  each  of  these  titles  without  attempting  to  indicate  the  moving 
party  in  appellate  cases,  especially  when  the  United  States  is  a  party. 


A.  B.  Dick  Co.,  Henry  ».,  294,  306 
Adams,  Broadway  Nat'l  Bank  v.,  233 
Adams  v.  Mercantile  Trust  Co.,  104 
Adams,  Millard  ».,  285 
Adams  v.  Robinson,  108,  109,  143 
Addyston  Pipe  &  Steel  Co.  t>.  United 

States,  245-247,  258,  272,  297 
Adelbert  College,    Wabash   R.   R.  »., 

82, 104, 145 

Alabama  &  Georgia  Mfg.  Co.  v.  Robin- 
son, 108,  109,  143 

Allen  v.  Dallas  &  Wichita  R.  R.,  33 
Allison,  Southern  Ry.  v,,  81 
Alsbrook,  Wilmington  &  Welden  R.  R. 

».,  286 
Aluminum  Co.  v.  United  States,  318, 

323 
American  Coal  Products  Co.  v.  United 

States,  318,  323 
American  Iron  Co.  v.   Seaboard    Air 

Line  Ry.,  124 
American  Loan  Co.,  Kneeland  ».,  113, 

121,  190 
American  Malt  Corporation  v.  Board 

of  Public  Utility  Commissioners,  219 
American  Naval  Stores  Co.  v.  United 

States,  318,  323 
American   Sugar   Refining   Co.,   Penn 

Sugar  Refining  Co.  t>.,  245 
American  Sugar  Refining  Co.  v.  United 

States,  240 
American  Tobacco  Co.,  United  States 

v.,  243,  249,  252,  262,  264,  266,  270, 

318,  323,  324 
American  Tobacco  Co.,  Ware-Kramer 

Tobacco  Co.  v.,  318,  323 
American  Trust  Co.  v.   Metropolitan 

Steamship  Co.,  99 
American   Waterworks   Co.,    Farmers 

Loan  &  Trust  Co.  ».,  115 
American  Writing  Paper  Co.,  Goodman 

v.,  214 
Appleton  Water  Works  Co.  v.  Central 

Trust  Co.,  104 


Arents  z>.  Commonwealth  (Va.),  70 

Armour  v.  United  States,  314 

Arms,  Kimberly  v.,  137 

Arnold,  Hussey  v.,  233 

Arnot  v.  Erie  R.  R.,  70 

Asphalt  Co.,  Gallagher  v.,  159,  160 

Asphalt  Co.  of  America,  Land  Title  & 

Trust  Co.  v.,  159 

Atlantic  Coast  Line,  Prentis  ».,  339 
Atlantic  Trust  Co.  v.  Chapman,  86,  99, 

101 
Atlantic  Trust  Co.  v.  Dana,  33, 113, 116 

Bailey  v.  New  York  Central  &  H.  R.  R.f 

228 

Bank  (Nat'l,  Newport),  Evertson  t>.,  164 
Barnard,  Clark  ».,  81 
Barnard  v.  Vermont  etc.  R.  R.,  228 
Barr  v.  N.  Y.,  Lake  Erie  &  Western 

R.  R.,  225 

Barrow,  Shields  «.,  139 
Barry  v.  Merchants'  Exchange  Co.,  3 
Batchelder  v.  C.  G.  W.  Co.,  18 
Batterman  Co.,  Odell  v.,  110 
Bedell,  Green  v.,  284 
Belden  v.  Burke,  225 
Bergdorf,  Matter  of,  51,  53 
Bergen,  Crawford  v.,  284 
Bergen  «.  U.  S.  Steel  Corporation,  230 
Bernheimer  v.  Converse,  89 
Bigelow,   Old   Dominion  Copper   Co. 

v.,  225-227 

Billingham  v.  Gleason  Mfg.  Co.,  228 
Binghampton   Light,    Heat   &    Power 

Co.  v.  Stevens,  Peo.  ex  rel.,  343 
Black  Hawk  Gold  Mining  Co.,  Carpen- 
ter ».,  3 

Blair  «.  City  of  Chicago,  88 
Blatchford,  Phillips  t>.,  233 
Blount  Mfg.  Co.  v.  Yale  &  Towne  Mfg. 

Co.,  305 

Blum  v.  Whitney,  224,  228,  229 
Board  of  Public  Utility  Commissioners, 

American  Malt  Corporation  v.,  219 


379 


380 


CASES  CITED  OR   DISCUSSED 


Boesch  v.  Graff,  137 

Booth  v.  Clark,  89 

Boston,  City  of,  Richardson  v.,  286 

Bostwick  v.  Young,  225 

Bosworth  v.  Hook,  138 

Bowen,  Burnham  v.,  120 

Boyd,  Northern  Pacific  R.  R.  v.,  191, 

195-198,  201 
Bradley  t>.  Bradley,  284 
Bray,  U.  S.  Fidelity  Co.  v.,  129 
Bridge  Operating  Co.  v.  Public  Service 

Comm.,  Peo.  ex  rel.,  344 
Brierfield  Co.,  Hollins  v.,  84 
Broadway  Nat'l  Bank  v.  Adams,  233 
Brown,  Davis  v.,  286 
Brown  &  Gregory  Ltd.,  In  re,  164 
Buckeye  Powder  Co.  v.  E.  I.  du  Pont 

de  Nemours  Powder  Co.,  302,  318, 

323 

Burke,  Belden  v.,  225 
Burnham  v,  Bowen,  120 
Burroughs    Adding    Machine    Co.    v. 

United  States,  319,  323 

Cambria  Steel  Co.,  Central  Improve- 
ment Co.  *.,  197 

Canada  Southern  Ry.  v.  Gebhard,  6 
Canandaigua  Academy  v.  McKechnie, 

56 

Carleton,  Cragin  v.,  285 
Carnegie  Steel  Co.,  Southern  Ry.   »., 

118,  121,  123,  124 
Carpenter  v.  Black  Hawk  Gold  Mining 

Co.,  3 

Can-others,  Mason  v.,  225,  228 
Center,  Elliott  Machine  Co.  v.,  308 
Central  Improvement  Co.  v.  Cambria 

Steel  Co.,  197 
Central  Lumber  Co.  v.  South  Dakota, 

296,  318,  323 
Central    R.    R.,  Virginia   &   Alabama 

Coal  Co.  ».,  123 
Central   Trust   Co.,   Appleton   Water 

Works  Co.  v.,   104 
Central    Trust     Co.     v.    Chattanooga 

R.  &  C.  R.  Co.,  116 
Central  Trust  Co.  v.  C.  H.  V.  &  T.  Ry., 

33 
Central  Trust  Co.  v.  Chicago  &  R.  I. 

R.  R.,  131,  162 
Central     Trust     Co.     v.     Cincinnati, 

H.  &  D.  Ry.,  132 
Central  Trust  Co.  v.  Grant  Locomotive 

Works,  129 

Central  Trust  Co.,  Julian  v.,  145 
Central  Trust  Co.  t>.  Madden,  129 
Central  Trust  Co.  v.  McGeorge,  84 


Central  Trust  Co.,  Wabash,  St.  Louis 

&  Pacific  Ry.  v.,  85,  86 
Central  Trust  Co.  v.  Worcester  Cycle 

Mfg.  Co.,  105,  106 
Central    West    Pub.    Co.    v.    United 

States,  3 18,  323 

C.  G.  W.  Co.,  Batchelder  v.,  18 
C.  H.  V.  &  T.  Ry.,  Central  Trust  Co. 

».,  33 
Chapman,  Atlantic  Trust  Co.  v.,  86, 

99,  101 

Chattanooga  R.  &  C.  R.  R.  Co.,  Cen- 
tral Trust  Co.  ».,  116 
Chicago,  City  of,  Blair  v.,  88 
Chicago   &    Milwaukee   Electric   Ry., 

Investment  Registry  v.,  131,  197 
Chicago    &   N.    W.   Ry.   v.   Whitton, 

Adm.,  81 

Chicago,  P.  &  St.  Louis  R.  R.,  Mer- 
cantile Trust  Co.  v.,  104,  106 
Chicago,  R.  I.  &  P.  R.  R.  v.  Howard,  70 
Chicago,  R.  I.  &  P.  R.  R.,  Watson  »., 

16,  18,  20,  44-46,  72 
Chicago  &  R.  I.  R.  R.,  Central  Trust 

Co.  v.,  131,  162 

Chicago  Ry.  Equipment  Co.  v.  Mer- 
chants National  Bank,  17 
Chicago     Ry.,     Merchants     Loan     & 

Trust  Co.  v.,  190. 
Chicago,  Snell  «.,  3 
Chicago  Terminal  Co.,  United  States 

Trust  Co.  v.,  110 
Chicago  &  Vincennes  Railroad  v.  Fos- 

dick,  104,  105,  111,  143 
Cincinnati,    H.    &    D.    Ry.,    Central 

Trust  Co.  ».,  132 
Cincinnati,  N.  O.  &  S.  Ry.,  Thomas  v., 

115 

Citizens'  Bank,  New  Orleans  ».,  286 
Citizens'  St.  R.  R.,  City  Ry.  Co.  v.,  29 
City  Ry.  Co.  v.  Citizens'  St.  R.  R.,  29 
Claflin  v.  Ostrom,  70 
Clark  v.  Barnard,  81 
Clark,  Booth  v.,  89 
Clarke,  France  v.,  164 
Clark,  Hulburt  v.,  38 
Clark  v.  Irvin,  284 
Cleland,  In  re,  88 

Clemes,  Hamilton  Trust  Co.  v.,  29 
Cleveland  etc.  R.   R.,   St.  Louis  etc. 

R.  R.  v.,  122 
Clum,  Eisenlord  v.,  285 
Clyde  v.  Richmond  &  D.  R.  Co.,  128 
Coe,  Pennock  v.,  32,  47 
Cohoes  Ry.  v.  Public  Service  Comm., 

Peo.  ex  rel.,  343 
Coleman,  Shields  v.,  145 


CASES  CITED  OR   DISCUSSED 


381 


Colgate  v.  U.  S.  Leather  Co.,  215,  218 
Colonial  Trust  Co.  ».  Wallace,  169 
Coltrane  v.  Templeton,  78 
Columbus,   Hocking  Valley  etc.   Ry. 

v.  Lanier,  225 
Commissioners,     Memphis     &     Little 

Rock  R.  R.  v.,  33 

Commonwealth  (Mass.),«.  Horton,  284 
Commonwealth  (Virginia) ,  Arents  v.,  70 
Compton  v.  Jessup,  32,  83,  104,  110 
Continental   Securities   Co,   v.    N.   Y. 

Central  R.  R.,  20 
Continental  Trust  Co.,  Rhode  Island 

Locomotive  Works  v.,  119,  121 
Continental  Trust  Co.  v.  Toledo,  St. 

L.  &  K.  C.  R.  R.,  83,  93,  110,  116 
Converse,  Bernheimer  v.,  89 
Converse  v.  Hamilton,  89. 
Corn  Products  Refining  Co.  v.  United 

States,  315 

County  of  Sac  (Iowa),  Cromwell  v.,  286 
Cowdrey,  Galveston  Railroad  v.,   116 
Cox  v.  Stokes,  203 
Cragin  v.  Carleton,  285 
Cravens,  St.  Louis  Mut.  L.  Ins.  Co.  v., 

285 

Crawford  v.  Bergen,  284 
Creamery  Package  Co.,  Virtue  v.,  305 
Cream  of  Wheat  Co.,  Great  A.  &  P. 

Tea  Co.  v.,  299,  302,  303 
Credits    Commutation  Co.  v.    United 

States,  130 

Cromwell  v.  County  of  Sac  (Iowa),  286 
Cudahy  Packing  Co.,  Frey  &  Son  »., 

283 

Curtis  v.  Leavitt,  3 
Cutting,  ex  parte,  130 

Dallas  &  Wichita  R.  R.,  Allen  ».,  33 
Dana,  Atlantic  Trust  Co.  v.,  33,  113, 

116 

Davis  v.  Brown,  286 
Davis,  Frank  v.,  44 
Davis  v.  Schwartz,  139 
Delaware,  L.  &  W.  R.  R.,  Troxell ».,  286 
Dennison  v.  United  States,  286 
De  Sollar  v.  Hanscome,  286 
D.  &  H.  Co.  v.  Public  Service  Comm., 

Peo.  ex  rel,  342 
D.  &  H.   Co.  v.   Stevens  (Publ.  Ser. 

Comm.)   Peo.  ex  rel.,  343 
(A.  B.)  Dick  Co.,  Henry  v.,  294,  306 
Dickerman  v.  N.  Trust  Co.,  88 
Diggs  v.  Fidelity  Co.,  51 
D.  L.  &  W.  R.  R.  v.  United  States,  312 
Dow,  Memphis  &  Little  Rock  R.  R.  »., 

186 


Dow  v.  Memphis  &  S.  R.  R.,  33,  116 

Dows,  Muller  v.,  81 

Drayton,  Haehulen  v.,  115 

Drexell,  Lake  Superior  Iron  Co.  v.,  214 

Dry  Dock  etc.  R.  R.,  v.  Public  Service 

Commission,  Peo.  ex  rel.,  344 
Duncan,  Ketchum  v.,  43 
Dumpor's  Case,  42 
Dunlop  v.  Mulry,  31 
(E.  I.)   du  Pont  de  Nemours  Powder 

Co.,  Buckeye  Powder  Co.  v.,   302, 

318,  323 

Eastern  States  Retail  Lumber  Dealers 
Association   v.   United   States,    298, 

319,  323 

Eastman  Kodak  Co.  v.  United  States, 

271 
East  Tennessee,  V.  &  G.  Ry.,  Toler  »., 

Ill 

Eisenlord  v.  Clum,  285 
Elgin  Board  of  Trade  v.  United  States, 

319,  323 

Elliott  Machine  Co.  v.  Center,  308 
Ellis  v.  Jameson,  285 
Enterprise  Transportation  Co.,  Whelan 

v.,  123 
Equitable  Trust   Co.   v.   United   Box 

Board  &  Paper  Co.,  197 
Erie  R.  R.,  Arnot  ».,  70 
Erie  Ry.,  Woodruff  ».,  101 
Ettlinger  v.  Persian  Rug  &  C.  Co.,  46 
Evening  Post  Co.,  Knott  v.,  104 
Eversonfl.  Gere,  70 
Evertson  v.  National  Bank,  Newport, 

164 

Fairmont  Creamery  Co.,  State  (Iowa) 

«.,  318 
Farmers  Loan  &  Trust  Co.  v.  American 

Waterworks  Co.,  115 
Farmers  Loan  &   Trust   Co.,    Lacka- 

wanna  Iron  &  Coal  Co.  v.,  118 
Farmers  Loan  &  Trust   Co.    v.    Lake 

Street  Elevated  Ry.  Co.,  104,  157 
Farmers  Loan  &  Trust  Co.  et  al.,   v. 

Louisville,  N.  A.  &  C.  Ry.  et  al.,  191 
Farmers  Loan  &  Trust  Co.  v.  Northern 

Pac.  R.  R.,  90,  102,  128 
Farmers  Loan  &  Trust  Co.,     Rhine- 
lander  v.,  26,  52,  55 
Farmers  Loan  &  Trust  Co.  v.  Toledo 

A.  A.  &  N.  M.  Ry.,  128,  135 
Fidelity  Co.,  Diggs  v.,  51 
First  National    Bank,     Cleveland,     v. 

Shedd, 205 

Fitchburg  R.  R.,  Polhemus  v.,  32 
Flint  &  P.  M.  R.  R.,  Mackintosh  ».,  70 


382 


CASES  CITED  OR   DISCUSSED 


Fordyce  ».  Omaha,  K.  C.  &  E.  R.  R., 

138 
Fosdick,  Chicago  &  Vincennes  Railroad 

v.,  104,  105,  111,  143 
Fosdick  v.  Schall,  118,  121 
Fowler  v.  Jarvis-Conklin  Mortgage  Co., 

173 

Fox,  Lawrence  v.,  48 
France  v.  Clarke,  164 
Frank  v.  Davis,  44 

Frey  &  Son  v.  Cudahy  Packing  Co.,  283 
Friedman's  Saving  Co.  v.  Shepherd,  116 
Frink,  McComb  v.,  286 
French  v.  Gapin,  126 
Frost  v.  Thompson,  233 
Furey,  Keatley  v.,  89 

Gallagher  v.  Asphalt  Co.  of  America, 

159,  160 

Galveston   Railroad  v.   Cowdrey,    116 
Gamble  v.  Queens  Co.  Water  Co.,  215 
Gapin,  French  v.,  126 
Gebhard,   Canada  Southern  Ry.  0.,  6 
General  Electric  Co.  v.  United  States, 

318,  323 

Gere,  Everson  v.,  70 
Gleason  Mfg.  Co.,  Billingham  v.,  228 
Goodman  v.  American  Writing  Paper 

Co.,  214 

Goodwin  v.  Roberts,  164 
Goy  &  Co.  Ltd.,  In  re,  164 
Graff,  Boesch  v.,  137 
Grant  v.  Winona  &  S.  W.  Ry.,  44 
Grant    Locomotive    Works,     Central 

Trust  Co.  v.,  129 
Great  A.  &  P.  Tea  Co.  v.  Cream   of 

Wheat  Co.,  299,  302,  303 
Great   Lakes   Towing   Co.   v.   United 

States,  269 
Great  Western  Mining  Co.  v.  Harris, 

89 

Great  Western  Ry.,  Hoole  ».,  228 
Green  v.  Bedell,  284 
Greene  Cove  Co.,  Guaranty  Trust  Co. 

«.,  107 

Greene,  In  re,  318 
Gregg  v.  Metropolitan  Trust  Co.,  122, 

124 

Grenada  Lumber  Co.  v.  Mississippi,  296 
Guarantee  Trust  Co.,  Wood  «.,  43 
Guaranty  Trust   Co.  v.  Greene  Cove 

Co.,  107 
Guaranty  Trust  Co.  v.  International 

Steam  Pump  Co.,  98,  158 
Guaranty  Trust  Co.,  N.  Y.  ».  Inter- 
national Typesetting  Machine  Co., 

189 


Guaranty  Trust  Co.,  N.  Y.  v.  Metro- 
politan St.  Ry.,  143,  151 
Gubner  v.  McClellan,  340 
Gue  v.  Tide  Water  Canal  Co.,  3,  47 
Guilford  v.  Minneapolis  &  C.  Ry.,  16 

Haehulen  v.  Dray  ton,  115 

Haight  v.  Pittsburg  &  C.  R.  R.,  19 

Hale  v.  Henkel,  314 

Hamburg- Amerikanische    Packetfahrt 

Actien    &    Gesellschaft    v.     United 

States,  319,  323 
Hamilton,  Converse  v.,  89 
Hamilton,  Vail  v.,  29 
Hamilton  Trust  Co.  v.  Clemes,  29 
Hanscome,  De  Sollar  v.,  286 
Harnickell  v.  Omaha  Water  Co.,  64 
Harriman     v.     Interstate     Commerce 

Commission,  314 
Harris  v.  Great  Western  Mining  Co., 

89 

Hartwell  R.  Co.,  Linder  v.,  46 
Hasbrouck  (Metropolitan  St.  Ry.  Co.), 

People  ».,  103 
Hayes,  Parsons  v.,  225 
Henkel,  Hale  v.,  314 
Henry  v.  A.  B.  Dick  Co.,  294,  306 
High  Ct.  of  F.,  Schreiner  v.,  284. 
Hocking  Valley  R.  R.  *.  N.  Y.  Coal 

Co.,  312 

Hollins  v.  Brierfield  Co.,  84 
Holmes  v.  Willard,  70 
Hook,  Bosworth  v.,  138 
Hoole  v.  Great  Western  Ry.,  228 
Horn  v.  Pere  Marquette  R.  R.,  84,  89, 

91-93 
Horton,    Commonwealth    (Mass),    v., 

284 
Howard,  Chicago,  R.  I.  &  P.  R.  R.  »., 

70 

Howe  v.  Morse,  233 
Howell,  In  re,  197 
Ho  well,    Mechanics    &    Metals    Nat. 

Bank  ».,  197 

Howell  v.  Western  R.  R.,  104,  111. 
Hulbert  v.  Clark,  38 
Humphreys,  Quincy  M.  &  P.  Co.  v., 

86,  101,  103 
Huron  Copper  Mining  Co.,  Jellinik  v., 

78 

Hussey  v.  Arnold,  233 
Hyde,  Krippendorf  v.,  127. 

Illinois  Midland  Co.,  Union  Trust  Co. 

«.,  99,  100 
Industrial  &  Trust  Co.  c.  Todd,   169, 

203 


CASES  CITED   OR   DISCUSSED 


383 


International  Harvester  Co.  v.  Mis- 
souri, 296 

International  Harvester  Co.  v.  United 
States,  253,  256 

International  Mercantile  Marine  Re- 
ceivership, 159 

International  Steam  Pump  Co., 
Guaranty  Trust  Co.  v.,  98,  158 

International  Steam  Pump  Co.,  Re- 
ceivership, 159 

International  Typesetting  Machine 
Co.,  Guaranty  Trust  Co.  c.,  189. 

Interstate  Commerce  Commission, 
Harriman  v.,  314 

Investment  Registry  v.  Chicago  & 
Milwaukee  Electric  Ry.,  131,  197 

Iron  Railway  Co.,  Robinson  v.,  205 

Irvin,  Clark  ».,  284 

Irvine  v.  N.  Y.  Edison  Co.,  51 

Jackson  v.  Ludeling,  47 

Jackson,  Parsons  v.,  19 

Jameson,  Ellis  v.,  285 

Jarvis-Conklin  Mortgage  Co.,  Fowler 

v.,  173 
Jellicoe  Mountain  Coal  &  Coke  Co.  v. 

U.  S.,  271 

Jellinik  v.  Huron  Copper  Mining  Co.,  78 
Jessup,  Compton  v.,  32,  83,  104,  110 
Joint    Traffic  Association  Cases,   243 

272,  297 
Joline  v.  Willcox   (Pub.  Ser.  Comm.) 

Peo.  ex  rel.,  339 
Julian  v.  Central  Trust  Co.,  145 
Ju  Toy  v.  United  States,  363 

Kanawha  &  O.  Ry.,  Mercantile  Trust 

Co.  ».,  78 
Kansas  City  Ry.  Co.,  State  Trust  Co. 

-o.,  104 

Kansas,  Smiley  v.,  297 
Keatley  v.  Furey,  89 
Keech  v.  Stowe-Fuller  Co.,  197 
Kent  v.  Quicksilver  Mining  Co.,  215, 

225 
Keokuk  &  Western  R.  R.  v.  Missouri, 

286 

Ketchum  v.  Duncan,  43 
Keystone  Watch  Co.  v.  United  States, 

268,  318,  323 
Kidansky,  Robert  v.,  45 
Kimberly  v.  Arms,  137 
Kings   Co.   Lighting    Co.   v.    Willcox 

(Pub.  Serv.  Comm.)  Peo.  ex  rel.,  344, 

373 
Kirven,     Virginia-Carolina     Chemical 

Co.  v.,  286 


Kneeland  v.  American  Loan  Co.,  113, 

121, 190 

Knight  v.  United  States,  243-245 
Knott  v.  Evening  Post  Co.,  104 
Kohn  v.  McNulta,  128 
Krippendorf  v.  Hyde,  127 

Lackawanna     Iron    &     Coal    Co.     •». 

Farmers  Loan  &  Trust  Co.,  118 
Lafayette   etc.   Ry.,   Rosen-Kraus  v., 

18 
Lake  Street  Elevated  Ry.  Co.,  Farmers 

Loan  &  Trust  Co.  v.,  104,  157 
Lake  Superior  Iron  Co.  v.  Drexel,  214 
Land  Title  &  Trust  Co.  v.  Asphalt  Co., 

159 

Lander  v.  Mercantile  Bank,  286 
Lanier,    Columbus,    Hocking    Valley 

etc.  Ry.  ».,  225 
Lansing,  Stewart  ».,  286 
Lary,  Wood  v.,  228 
Lawlor,  Loewe  v.,  291 
Lawrence  v.  Fox,  48 
Leavitt,  Curtis  v.,  3 
Lee,  Noonan  v.,  44 
Lehigh  Valley  R.  R.  v.  United  States, 

312 
Lewisohn,  Old  Dominion  Copper  Co. 

v.,  226,  227,  229 
Linder  v.  Hartwell  R.  Co.,  46 
Little,  Wilson  ».,  11 
L.  N.  E.  &  St.  Louis  Consol.  Ry.,  N.  Y. 

Security  v.,  32 
Loewe  v.  Lawlor,  291 
Logan  County  Bank  v.  Townsend,  29 
Logansport  Ry.,  Miltenberger  v.,  122 
Lord  v.  Yonkers  Fuel  Gas  Co.,  32 
Louisville,    N.   A.   &   C.   Ry.,   et  al., 

Farmers  Loan  &  Trust  Co.  ».,  191 
Louisville  N.  A.  &  C.  Ry.  v.  Louisville 

Trust  Co.,  29,  191,  194,  197 
Louisville  Trust  Co.,  Louisville  N.  A. 

&  C.  Ry.  ».,  29,  191,  194,  197 
Lowry,  Montague  &  Co.  v.,  297 
Ludeling,  Jackson  v.,  47 

Maas  r.  Mo.  Kan.  &  Texas  Ry.,  17 
Mackay  v.  Randolph,  44 
Mackintosh  v.  Flint  &  P.  M.  R.  R.,  70 
Madden,  Central  Trust  Co.  v.,  129 
Mallory  v.  W.  S.  R.  R.,  18,  42 
Mandel,  In  re,  344 
Mason  v.  Carrothers,  225,  228 
Masten,  Minot  v.,  110 
Matter  of  Bergdorf,  51,  53 
Matter  of  Public  Service  Commission 
(In  re  Mandel),  344 


384 


CASES  CITED  OR  DISCUSSED 


Mayer  v.  Metropolitan  Traction  Co., 

225 

Mayo  v.  Moritz,  233 
McClellan,  Gubner  v.,  340 
McClelland  v.  Norfolk  &  Southern  R. 

RM  16 

McComb  v.  Frink,  286 
McGeorge,   Central  Trust  Co.   v.,   84 
McKechnie,     Canandaigua    Academy 

v.,  56 

McLeod  v.  City  of  New  Albany,  129 
McLish  v.   Roff,   129 
McNulta,  Kohn  v.,  128 
Mechanics    &    Metals    Nat.    Bank    v. 

Howell,  197 

Memphis  &  Little  Rock  R.  R.  v.  Com- 
missioners, 33 
Memphis  &  Little  Rock  R.  R.  v.  Dow, 

186 
Memphis  &  Little  Rock  R.  R.,  Sage  v., 

116 

Memphis  &  S.  R.  R.,  Dow  «.,  33,  116 
Mercantile  Bank,  Lander  v.,  286 
Mercantile  Trust  Co.,  Adams  v.,  104 
Mercantile  Trust  Co.  v.  Chicago  P.  & 

St.  L.  R.  R.,  104,  106 
Mercantile  Trust  Co.  v.  Kanawha  &  O. 

Ry.,  78 

Merchants'  Exchange  Co.,  Barry  v.,  3 
Merchants    Loan     &    Trust     Co.    v. 

Chicago  Ry.,  190 
Merchants    National     Bank,    Chicago 

Ry.  Equipment  Co.  v.,  17 
Merriam  «.  Ross,  Peo.  ex  rel.,  85 
Metropolitan  Ry.  Receivership,  In  re, 

86,  103, 162 

Metropolitan  Steamship  Co.,  American 
|k  Trust  Co.  v.,  99 
Metropolitan  St.  Ry.,  Guaranty  Trust 

Co.  v.,  143,  151 
Metropolitan  Traction  Co.,  Mayer  v., 

225 
Metropolitan  Trust  Co.,  Gregg  v.,  122, 

124 

Millard  v.  Adams,  285 
Mills,  Windsor  ».,  232 
Miltenberger  v.  Logansport  Ry.,  122 
Milton,  Williams  v.,  233 
Minneapolis  etc.  Ry.,  Guilford  ».,  16 
Minnesota  v.  Northern  Securities  Co., 

288 

Minnesota  Rate  Cases,  373 
Minot  v.  Masten,  110 
M.  K.  &  T.  Ry.  v.  Union  Trust  Co., 

64 
Mississippi,  Grenada  Lumber  Co.  v., 

296 


Missouri,  International  Harvester  Co. 

v.,  296 
Missouri,  Keokuk  &  Western  R.  R.  v., 

286 

Missouri  Rate  Cases,  373 
Mo.  Kan.  &  Texas  Ry.,  Maas  v.,  17 
Monon  Cases,  29,  191,  194,  197 
Montague  &  Co.  v.  Lowry,  297 
Morgan's  Co.  v.  Texas  Central  Ry.,  43, 

45,  83,  104,  105,  109 
Morgan,  Williams  v.,  130 
Moritz,  Mayo  v.,  233 
Morse,  Howe  v.,  233 
Motion  Picture  Patents  Co.  v.  United 

States,  272 
Muller  v.  Dows,  81 
Mulry,  Dunlop  v.,  31 

Nash  v.  United  States,  250,  273,  298, 

323. 
National  Association,  Retail  Druggists 

v.  United  States,  318,  323 
National  Bank,  Newport,  Evertson  v,, 

164 
National  Cash  Register  Case,  273,  302, 

318 
National    Cotton    Oil    Co.    v.    Texas, 

297 

National  Wholesale  Jewelers  Associa- 
tion v.  United  States,  319,  323 
Nesbit  v.  Riverside  Independent  Dis- 
trict, 286 

New  Albany,  City  of,  McLeod  v.,  129 
New  Departure    Mfg.    Co.    v.    United 

States,  319,  323 

New  Orleans  v.  Citizens'  Bank,  286 
New  York  Car  Wheel  Wks.,  In  re,  70 
New  York  Central  &  H.  R.  R.,  Bailey 

v.,  228 
New  York  Central  R.  R.,  Continental 

Securities  Co.  ».,  20 
New  York  Central  R.  R.,  Switzerland 

Co.  ».,  37 
New  York  City  Ry.,  Penn  Steel  Co. 

».,  101,  113,  119,  123,  124,  162 
New  York  Coal  Co.,  Hocking  Valley 

R.  R.  v.,  312 

New  York  Edison  Co.,  Irvine  v.,  51 
New    York    Edison    Co.    v.    Willcox, 

(Pub.  Serv.  Comm.)  Peo.  ex  rel.,  344 
New  York,  L.  E.  &  W.  R.  R.,  Barr  »., 

225 
New  York,  L.  E.  &  W.  R.  R.,  New 

York,  P.  &  O.  R.  R.  v.,  78 
New  York,  N.  H.  &  Hartford  R.  R. 

v.  Willcox  (Pub.  Serv.  Comm.)  Peo. 

ex  rel.,  341 


CASES  CITED  OR   DISCUSSED 


385 


New  York,  P.  &  O.  R.  R.  v.  New  York, 

L.  E.  &  W.  R.  R.,  78 
New  York  &  Queens  Co.  Ry.,  Public 

Service  Commission  v.,  344 
New  York   Railways,    Public   Service 

Comm.  v.,  344 
New  York  Security  v.  L.  N.  E.  &  St. 

L.  Consol.  Ry.,  32 
Nome   Retail  Grocers'   Association   v. 

United  States,  318,  323 
Noonan  v.  Lee,  44 
Norfolk  &  Southern  R.  R.,  McClelland 

«.,  16 

North  Carolina  R.  R.  v.  Swasey,  137 
Northern  Pacific  R.  R.  v.  Boyd,  191, 

195-198,  201 
Northern  Pacific  R.  R.,  Farmers  Loan 

&  Trust  Co.  ».,  90,  102,  128] 
Northern  Pacific  Ry.  v.  Parker,  30 
Northern  Pacific  Ry.,  Paton  v.,  192 
Northern  Securities  Co.,  Minnesota  v., 

288 
Northern    Securities    Co.    v.    United 

States,  247,  251,  259,  269,  272,  298 
N.  Trust  Co.,  Dickerman  ».,  88 
Northrop,  Stillman  v.,  70 

Odell  v.  Batterman  Co.,  110 

Odessa  Waterworks  Co.,  Wood  ».,   228 

Olcott  v.  Tioga  R.  R.,  70 

Old  Dominion  Copper  Co.  v.  Bigelow, 

225-227 
Old  Dominion  Copper  Co.  v.  Lewisohn, 

226,  227,  229 
Omaha,  K.  C.  &  E.  R.  R.,  Fordyce  v., 

138 

Omaha  Water  Co.,  Harnickell  v.,  64 
Omaha  Water  Co.,  U.  S.  Water  Works 

Co.  Ltd.  t>.,  165,  203 
Ostrom,  Claflin  v.,  70 

Pacific  Coast  Plumbing  Supply  Asso- 
ciation v.  United  States,  319,  323 

Parker,  N.  O.  Pac.  Ry.  v.,  30 

Parkinson  v.  West  End  Ry.,  18 

Parsons  v.  Hayes,  225 

Parsons  v.  Jackson,  19 

Paton  v.  Northern  Pacific  Ry.,  192 

Patten  v.  United  States,  298 

Patterson  v.  United  States,  273,  302, 318 

Pennock  v.  Coe,  32,  47 

Pennsylvania  Steel  Co.  v.  N.  Y.  City 
Ry.,  101,  113,  119,  123,  124,  162 

Pennsylvania    Sugar   Refining    Co.    v. 
American  Sugar  Refining  Co.,  245 

Peo.  v.  Hasbrouck    (Metropolitan   St. 
Ry.  Co.,  103 
2c 


Peo.  ex  rel.  Binghampton  Light,  Heat 

&  Power  Co.  v.  Stevens,  343 
Peo.  ex  rel.  Bridge  Operating  Co.  v. 

Public  Service  Commission,  344 
Peo.  ex  rel.  Cohoes  Ry.  v.  Public  Ser- 
vice  Comm.,   343 

Peo.  ex  rel.  D.  &  H.  Co.  v.  Public  Ser- 
vice Comm.,  342 
Peo.  ex  rel.  D.  &  H.  Co.  v.  Stevens 

(Pub.  Serv.  Comm.),  343 
Peo.  ex  rel.  Dry  Dock  etc.  R.  R.  v. 

Public  Service  Comm.,  344 
Peo.  ex  rel.  Joline  v.  Willcox  (Public 

Service  Comm.),  339 
Peo.  ex  rel.  King's  County  Lighting  Co. 

v.  Willcox  (Pub.  Serv.  Comm.),  344, 

373 

Peo.  ex  rel.  Merriam  v.  Ross,  85 
Peo.  ex  rel.  N.  Y.  Edison  Co.  v.  Will- 
cox (Pub.  Serv.  Comm.),  344 
Peo.  ex  rel.  N.  Y.  N.  H.  &  Hartford  R. 

R.  v.  Public  Service  Commission,  341 
Peo.  ex  rel.  South  Shore  Traction  Co. 

v.  Willcox  (Pub.  Serv.  Comm.),  340 
Peo.  ex  rel.  Ulster  &  Delaware  R.  R. 

v.  Public  Service  Comm.,  344 
Pere  Marquette  R.  R.,  Horn  ».,   84, 

89,  91-93 

Persian  Rug  etc.  Co.,  Ettlinger  ».,  46 
Philadelphia    Jobbing     Confectioners' 

Association  v.  United  States,  319,  323 
Phillips  v.  Blatchford,  233 
Pittsburgh  etc.  R.  R.,  Haight  ».,  19 
Place,  Russell  «.,  286 
Polhemus  v.  Fitchburg  R.  R.,  32 
Powder  Trust  Case,  249,  268 
Prentis  v.  Atlantic  Coast  Line,  339 
Pronick  v.  Spirits  Distributing  Co.,  215 
Public  Service  Commission  (Stevens), 

Binghampton  Light,  Heat  &  P.  Co. 

v.,  Peo.  ex  rel.,  343 
Public    Service    Commission,    Bridge 

Operating  Co.  v.,  Peo.  ex  rel.,  344 
Public  Service  Commission  (Stevens), 

D.  &  H.  Co.  v.,  Peo.  ex  rel.,  343 
Public    Service    Commission,    Cohoes 

Ry.  v.,  Peo.  ex  rel.,  343 
Public  Service  Commission,  D.  &  H. 

Co.  ».,  Peo.  ex  rel.,  342 
Public  Service  Commission,  Dry  Dock 

etc.  R.  R.  v.,  Peo.  ex  rel.,  344 
Public  Service  Commission,  Matter  of 

(Mandel),  344 
Public  Service  Commission  v.  N.  Y.  & 

Queens  Co.  Ry.,  344 
Public  Service  Commission  v.   N.  Y. 

Rys.,  344 


386 


CASES  CITED  OR   DISCUSSED 


Public  Service  Commission,  Ulster  & 

Delaware  R.  R.  ».,  Peo.  ex  rel.,  344 
Public   Service   Commission   v.   West- 

chester  Street  R.  R.,  343 
Public  Service  Commission  (Willcox), 

Joline  v.,  Peo.  ex  rel.,  339 
Public  Service  Commission  (Willcox), 

Kings  Co.  Lighting  Co.  v.,  Peo.  ex  rel., 

344,  373 
Public  Service  Commission  (Willcox), 

N.  Y.  Edison  Co.  v.,  Peo.  ex  rel.,  344 
Public  Service  Commission  (Willcox), 

N.  Y.,  N.  H.  &  Hartford  v.,  Peo.  ex 

rel.,  341 
Public  Service  Commission   (Willcox) 

v.  South  Shore  Traction  Co.,  Peo.  ex 

rel.,  340 
Pursell,  Riggs  v.,  31 

Queens  Co.  Water  Co.,  Gamble  «.,  215 
Quicksilver  Mining  Co.,  Kent  v.,  215, 

225 
Quincy  M.  &  P.  Co.  v.  Humphreys, 

86,  101,  103 

Railroad  Co.  v.  Bailey,  228 
Railroad  Co.  v.  Fordyce,  138 
Railroad  Co.  v.  Howard,  70 
Railroad  Co.  ».  Thomas,  124 
Railway  Co.  v.  Whitton,  81 
Randolph,  Mackay  ».,  44 
Reading  Co.  v.  United  States,  270,  298, 

312 
Rhinelander  v.  Farmers  Loan  &  Trust 

Co.,  26,  52,  55 
Rhode    Island    Locomotive   Works   v. 

Continental  Trust  Co.,  119,  121 
Richardson  v.  City  of  Boston,  286 
Richmond  &    D.    R.    Co.,    Clyde   v., 

128 
Richmond  Light  &  R.  R.  Co.,  Willcox 

v.,   342,   343 
Riggs  v.  Pursell,  31 
Riley,  St.  Louis  Trust  Co.  ».,  119 
Riverside  Independent  District,  Nesbit 

«.,  286 

Roberta.  Kidansky,  45 
Roberts,  Goodwin  «.,  164 
Robinson,  Adams  v.,  108,  109,  143 
Robinson,  Alabama  &  G.  Mfg.  Co.  »., 

108,  109,  143 

Robinson  v.  Iron  Ry.,  205 
Roff,  McLish  v.,  129 
Rogers  etc.  v.  Southern  R.  Association, 

70 

Romodka  Co.,  In  re,  70 
Rosenkrans  v.  Lafayette  etc.  Ry.,  18 


Ross,  Merriam  v.,  State  (Mo.)  ex  rel.,  85 
Russell  v.  Place,  286 

Sac,  County  of  (Iowa)  v.  Cromwell,  286 
Sage  v.  Memphis  &  Little  Rock  R.  R., 

116 
St.  Louis  Mut.  L.  Ins.  Co.  v.  Cravens, 

285 
St.  Louis  etc.  R.  R.  v.  Cleveland  etc. 

R.  R.,  122 

St.  Louis  Terminal  Case,  270,  272 
St.  Louis  Trust  Co.  v.  Riley,  119 
Sampson,  Wiswell  v.,  110 
Schall,  Fosdick  v.,  118,  121 
Schreiner  v.  High  Ct.  of  F.,  284 
Schreyer,  Vanderbilt  v.,  45 
Schwartz,  Davis  v.,  139 
Seaboard  Air  Line  Ry.,  American  Iron 

Co.  •».,  124 
Seymour  v.   Spring   Forest   Cemetery 

Association,  224,  225 
Shedd,  First  National  Bank,  Cleveland 

».,  205 
Shepherd,  Friedman's  Saving  Co.  v., 

116 

Shields  v.  Barrow,  139 
Shields  v.  Coleman,  145 
Sickles,   Washington  A.   &  G.   Steam 

Packet  v.,  286 
Smiley  v,  Kansas,  297 
Snell  v.  Chicago,  3 
Southard  v.  Southard,  232 
South   Dakota,   Central   Lumber  Co. 

v.,  296,  318,  323 
Southern  Pacific  R.  R.  Co.  v.  United 

States,  261,  285,  286 
Southern  Ry.  v.  Allison,  81 
Southern   Ry.   v.    Carnegie   Steel  Co., 

118,  121,  123,  124 
Southern   R.  Association,  Rogers  etc. 

v.,  70 

Southern  Wholesale  Grocers'  Associa- 
tion v.  United  States,  319,  323 
South  Shore  Traction  Co.  v.  Willcox 

(Pub.  Serv.  Comm.) ,  Peo.  ex  rel.,  340 
Sperry,  Jones  &  Co.,  Tompkins  ».,  225 
Spirits  Distributing  Co.,  Pronick  v.,  215 
Spring  Forest  Cemetery  Association, 

Seymour  v.,  224,  225 
Standard  Co.,  Windmuller  ».,  70 
Standard  Oil  Co.  v.  United  States,  243, 

249,  252,  254,  258,  260,  270,  318,  323, 

324 
Standard  Sanitary  Mfg.  Co.1 «.  United 

States,  305,  319,  323 
Standard  Wood  Co.  v.  United  States, 

319,  323 


CASES  CITED   OR   DISCUSSED 


387 


State  (Iowa)  v.  Fairmont  Creamery  Co., 

318 

State  (Mo.)  ex  rel.  Merriam  v.  Ross,  85 
State  Trust  Co.  v.  Kansas  City  Ry.  Co., 

104 
Stevens    (Pub.   Serv.    Comm.),   Bing- 

hampton  Light,  Heat  &  Power  Co. 

v.,  Peo.  ex  rel.,  343 
Stewart  v.  Lansing,  286 
Stillman  v.  Northrop,  70 
Stokes,  Cox  v.,  203 
Stoneburner,     Universal     Savings     & 

Trust  Co.  v.,  92 
Stone  v.  United  States,  286 
Stowe-Fuller  Co.,  Keech  v.,  197 
Swann  v.  Wright's  Executor,  145 
Swasey,  North  Carolina  R.  R.  v.,  137 
Switzerland  Co.  v.  N.  Y.  Central  R.  R., 

37 
Syracuse  etc.  R.  R.,  In  re,  225 

Templeton,  Coltrane  v.,  78 

Terminal  Ry.  Association  v.  United 
States,  243,  270,  272 

Texas  Central  Ry.,  Morgan's  Co.  v., 
43,  45,  83,  104,  105,  109 

Texas,  National  Cotton  Oil  Co.  v.,  297 

Texas,  Waters-Pierce  Oil  Co.  v.,  297 

Third  Avenue  Ry.  Case,  188 

Thomas  t>.  Cincinnati,  N.  O.  &  S.  Ry., 
115 

Thomas  v.  Western  Car  Co.,  124 

Thompson,  Frost  ».,  233 

Tide  Water  Canal  Co.,  Gue  v.,  3,  47 

Tioga  R.  R.,  Olcott  v.,  70 

Titus  v.  United  States  Smelting,  Re- 
fining &  Mining  Exploration  Co.,  166 

Todd,  Industrial  &  Trust  Co.  v.,  169, 
203 

Toledo,  A.  A.  &  N.  M.  Ry.,  Farmers 
Loan  &  Trust  Co.  v.,  128,  135 

Toledo,  St.  L.  &  K.  C.  R.  R.,  Con- 
tinental Trust  Co.  v.,  83,  93,  110,  116" 

Toler  v.  East  Tennessee,  V.  &  G.  Ry., 
Ill 

Tompkins  v.  Sperry,  Jones  &  Co.,  225 

Townsend,  Logan  County  Bank  v.,  29 

Trans-Missouri  Freight  Association  v. 
United  States,  243 

Troy,  City  of,  v.  United  Traction  Co., 
341 

Troxell  v.  Delaware,  L.  &  W.  R.  R.,  286 

Ulster  &  Delaware  R.  R.  Co.  ».  Pub. 

Serv.  Comm.  Peo.  ex  el.,  344 
Union  Pacific  R.  R.  v.  United  States, 

250,  258,  261,  262,  269,  270,  272 


Union  Trust  Co.  v.  Illinois  Midland 
Co.,  99,  100 

Union  Trust  Co.,  M.  K.  &  T.  Ry.  v.,  64 

United  Box  Board  &  Paper  Co.,  Equi- 
table Trust  Co.  ».,  197 

United  Shoe  Mfg.  Co.  v.  United 
States,  305,  306,  309 

United  States  v.  Addyston  Pipe  & 
Steel  Co.,  245,  258,  272,  297 

United  States  v.  Aluminium  Co.,  318, 
323 

United  States  v.  American  Coal  Prod- 
ucts Co.,  318,  323 

United  States  v.  American  Naval 
Stores  Co.,  318,  323 

United  States  v.  American  Sugar  Re- 
fining Company,  240 

United  States  v.  American  Tobacco 
Co.,  243,  249,  252,  262,  264,  266, 
270,  318,  323,  324 

United  States  v.  Armour,  314 

United  States  v.  Burroughs  Adding 
Machine  Co.,  319,  323 

United  States  v.  Central  West  Pub.  Co., 

318,  323 

United  States  v.  Corn  Products  Re- 
fining Co.,  315 

United  States  v.  Credits  Commutation 
Co.,  130 

United  States  v.  Dennison,  286 

United  States  v.  D.  L.  &  W.  R.  R.  Co., 
312 

United  States  v.  Eastern  States  Retail 
Lumber  Dealers'  Association,  298, 

319,  323 

United  States  v.  Eastman  Kodak  Co., 

271 
United  States  v.  Elgin  Board  of  Trade, 

319,  323 
United  States  v.  General  Electric  Co., 

318,  323 
United  States  v.  Great  Lakes  Towing 

Co.,  269 
United     States     v.     Hamburg-Ameri- 

kanische         Packetfahrt         Actien 

Gesellschaft,  319,  323 
United    States   v.    International    Har- 
vester Co.,  253,  256 
United    States    v.    Jellicoe    Mountain 

Coal  &  Coke  Co.,  271 
United   States  v.  Joint  Traffic   Asso., 

243,  272 

United  States  v.  Ju  Toy,  363 
United  States  v.  Keystone  Watch  Co., 

268,  318,  323 

United  States  ».  Knight,  243-245 
United  States  v.  Lehigh  Valley  R.  R.,  312 


388 


CASES  CITED   OR   DISCUSSED 


United     States     v.     Motion     Picture 
•  Patents  Co.,  272 
United  States  v.  Nash,  250,  273,  298, 

323 
United  States  v.  National  Association 

Retail  Druggists,  318,  323 
United  States  v.  National  Cash  Regis- 
ter Company,  273,  302,  318 
United  States  v.   National  Wholesale 

Jewellers'  Association,  319,  323 
United  States  v.  New  Departure  Mfg. 

Co.,  319,  323 
United  States  v.  Nome  Retail  Grocers' 

Association,  318,  323 
United  States  v.   Northern  Securities 

Co.,  247,  251,  259,  269,  272,  298 
United  States  v.  Pacific  Coast  Plumb- 
ing Supply  Association,  319,  323 
United  States  v.  Patten,  298 
United  States  v.  Patterson,  273,  302, 

318 
United  States  v.  Philadelphia  Jobbing 

Confectioners'  Association,  319,  323 
United   States   v.  Powder  Trust,  249, 

268 
United  States  v.  Reading  Co.,  270,  298, 

312 
United  States  v.  Southern  Pacific  R.  R. 

Co.,  261,  285,  286 
United  States  v.  Southern  Wholesale 

Grocers'  Association,   319,  323 
United  States  v.  Standard  Oil  Co.,  243, 

249,  252,  254,  258,  260,  270,  318, 
323,  324 

United  States  v.  Standard  Sanitary  Mfg. 
Co.,  305,  319,  323 

United  States  v.  Standard  Wood  Co., 
319,  323 

United  States  v.  Stone,  286 

United  States  v.  Terminal  Ry.  Associa- 
tion, 243,  270,  272 

United  States  v.  Trans-Missouri 
Freight  Association,  243 

United  States  v.  Union  Pacific  R.  R., 

250,  258,  261,  262,  269,  270,  272 
United  States  ».  United  Shoe  Mfg.  Co., 

305,  306,  309 

United  States  v.  United  States  Machin- 
ery Co.,  289,  290 
United  States  v.  United  States  Steel 

Corporation,  253,  254,  268 
United  States  v.  Winslow,  305 
United  States  Fidelity  Co.  v.  Bray,  129 
United  States  Leather  Co.,  Colgate  v.t 

215,  218 

United  States  Machinery  Co.  v. 
United  States,  289,  290 


U.    S.    &    Mex.    Trust   Co.,    Western 

Union  Co.  v.,  110,  197 
U.    S.    Smelting,    Refining   &    Mining 

Exploration  Co.,  Titus  ».,  166 
U.  S.  Steel  Corporation,  Bergen  v.,  230 
U.    S.    Steel    Corporation    v.    United 

States,  253,  254,  268 
U.  S.  Trust  Co.  v.  Chicago  Terminal 

Co.,  110 

U.  S.  Trust  Co.  v.  Wabash,  115 
U.  S.  Water  Works  Co.  Ltd.  v.  Omaha 

Water  Co.,  165,  203 
Universal    Savings    &    Trust    Co.    v. 

Stoneburner,  92 
United  Traction  Co.,  Troy,  City  of,  v., 

341 
UticaBank,  Yates  v.t  286 

Vail  v.  Hamilton,  29 

Vanderbilt  v.  Schreyer,  45 

Vermont  etc.  R.  R.,  Barnard  v.,  228 

(the)  Vigilancia,  29 

Virginia  &  Alabama  Coal  Co.  z>.  Cen- 
tral R.  R.,  123 

Virginia-Carolina  Chemical  Co.  v. 
Kirven,  286 

Virtue  v.  Creamery  Package  Co.,  305 

Wabash  R.  R.  v.  Adelbert  College,  82, 

104,  245 
Wabash,   St.  Louis  &  Pacific  Ry.  v. 

Central  Trust  Co.,  85,  86 
Wabash,  United  States  Trust  Co.  v., 

115 

Wallace,  Colonial  Trust  Co.  v.,  169 
Ware-Kramer    Tobacco    v.    American 

Tobacco  Co.,  318,  323 
Washington,  A.  &  G.  Steam  Packet  Co. 

v.  Sickles,  286 

Waters-Pierce  Oil  Co.  v.  Texas,  297 
Watson    v.    Chicago,    Rock    Island    & 

Pacific  R.  R.,  16,  18,  20,  44-46,  72 
Wenner,  West  Shore  R.  R.  v.,  31 
Westchester     Street    R.     R.,     Public 

Service  Commission  0.,  343 
West  End  Ry.,  Parkinson  v.,  18 
Western  Car  Co.,  Thomas  v.,  124 
Western  R.  R.,  Howell  t>.,  104,  111 
Western  Union  Co.  v.  U.  S.  &  Mex. 

Trust  Co.,  110,  197 
West  Shore  R.  R.,  Mallory  v.,  18,  42 
West  Shore  R.  R.  v.  Wenner,  31 
Whelan  v.  Enterprise  Transportation 

Co.,  123 

Whitney,  Blum  v.,  224,  228,  229 
Whitton,    Admr.,    Chicago   &    North- 
western Ry.  v.,  81 


CASES  CITED  OR  DISCUSSED 


389 


Willard,  Holmes  v.,  70 

Willcox    (Pub.    Serv.    Comm.),    New 

York,  N.  H.  Hartford  R.  R.  ».,  Peo. 

ex  rel.,  341 
Willcox    (Pub.    Serv.    Comm.),    New 

York  Edison  Co.  v.,  344 
Willcox  (Pub.  Serv.  Comm.)  v.  Rich- 
mond Light  &  R.  R.,  342,  343 
Willcox  (Publ.  Serv.  Comm.),  South 

Shore  Traction  Co.  v.,  Peo.  ex  rel., 

340 

Williams  v.  Milton,  233 
Williams  v.  Morgan,  130 
Wilmington     &     Weldon     R.     R.     v. 

Alsbrook,  286 
Wilson  v.  Little,  11 
Wilson  v.  Winter,  109 
Windmuller  ».  Standard  Co.,  70 
Winsor  v.  Mills,  232 


Winona  &  S.  W.  Ry.,  Grant  v.,  44 

Winslow  v.  United  States,  305 

Winter,  Wilson  v.,  109 

Wiswell  v.  Sampson,  110 

Wood  v.  Guarantee  Trust  Co.,  43 

Wood  v.  Lary,  228 

Wood  -o.  Odessa  Waterworks  Co.,  228 

Woodruff  v.  Erie  Ry.,  101 

Worcester    Cycle    Mfg.    Co.,    Central 

Trust  Co.  v.,  105,  106 
Wright's  Executor,  Swan  v.,  145 
W.  S.  R.  R.,  Mallory  v.,  18,  42 


Yale  &  Towner  Mfg.  Co.,  Blount  Mfg. 

Co.  v.,  305 

Yates  v.  Utica  Bank,  286 
Yonkers  Fuel  Gas  Co.,  Lord  v.,  32 
Young,  Bostwick  v.,  225 


Printed  in  the  United  States  of  America. 


E  following  pages  contain  advertisements  of  a 
few  of  the  Macmillan  books  on  kindred  subjects 


Law  and  Order  in  Industry 

BY   JULIUS   HENRY   COHEN 

Cloth,  I2tno,  $1.50 


A  lawyer  who  knows  the  facts  of  the  case  from  intimate 
knowledge  gives  in  this  book  a  comprehensive  story  of  the 
"  Protocol "  experiences  in  the  cloak  and  suit  industry  of  New 
York.  He  describes  vividly  the  processes  and  results  of 
collective  dealing  between  a  trades  union  and  an  employers' 
association  covering  a  period  of  five  years.  The  solution  of 
the  apparently  baffling  problems  furnishes  lessons  of  great 
immediate  and  future  import  to  all  employers  of  labor,  trades 
unionists,  social  reformers  and  students  of  political  science 
and  economics. 

"  The  book  is  a  distinct  contribution  to  the  science  of  social 
relations  and  as  such  should  have  a  wide  reading  both  here 
and  abroad." —  The  Independent. 

"  His  book  is  a  sound  and  reliable  study  of  a  small,  but 
significant,  phase  of  a  world- wide  movement." 

—  Boston  Daily  Advertiser. 


THE   MACMILLAN  COMPANY 

Publishers  64-66  Fifth  Avenue  New  York 


Voting  Trusts:  Chapters  in  Recent  Cor- 
porate History 


BY    HARRY   A.    GUSHING 

Of  the  New  York  Bar 


Cloth,  8vo,  $1.50 


This  is  a  concisely  written  volume  of  real  interest  to  inves- 
tigators and  business  men  as  well  as  to  trust  company  officials 
and  lawyers.  It  is  the  first  book  on  the  subject  and  covers 
the  early  history  of  voting  trusts  and  the  details  of  their  more 
recent  development.  The  facts  have  been  gathered  and 
collated  with  substantial  thoroughness  as  illustrations  of  the 
discussion  under  the  three  heads  of  the  significance,  the  con- 
tents, and  the  law  of  voting  trusts.  A  selection  of  important 
documents  is  also  included. 

"  This  is  a  book  on  a  modern  development  of  corporate  law 
written  by  one  who  shows  an  intimate  acquaintance  with 
present  commercial  methods  and  with  recent  history  of  cor- 
porate management.  Mr.  Cushing's  literary  style  is  excellent, 
his  citation  of  authorities  is  exhaustive,  and  he  has  given  in 
compact  form  a  clear  and  illuminating  statement  of  the  law 
of  voting  trusts  not  elsewhere  to  be  found." 

—  Harvard  Law  Review. 

"The  first  adequate  treatise  on  that  modern  development 
in  the  direction  of  corporate  activity." 

— Journal  of  Commerce  and  Commercial  Bulletin. 


THE   MACMILLAN  COMPANY 

Publishers  64-66  Fifth  Avenue  New  Tork 


A  History  of  Currency  in  the  United 
States 

BY   A.    BARTON    HEPBURN,   LL.D. 

Chairman  of  the  Board  of  Directors  of  the  Chase  National  Bank,  formerly 
Comptroller  of  the  Currency,  ex-Superintendent  of  Banks  of  the  State 
of  New  York,  ex-President  of  the  New  York  Chamber  of  Com- 
merce and  ex- President  of  the  New  York  Clearing  House 

New  edition,  cloth,  8vo,  $2.50 


The  purpose  of  this  volume  is  to  place  before  the  public 
all  the  essential  facts  as  to  currency,  coinage  and  banking, 
from  the  wampumpeage  of  the  colonies  to  the  notes  of  our 
Federal  Reserve  Banks  as  well  as  the  indispensable  political 
history  connected  therewith. 

"  Nobody  who  follows  financial  subjects  can  afford  to  be 
without  this  book  .  .  .  libraries  ought  to  have  it,  men  of  busi- 
ness should  study  it,  and  would  find  pleasure  in  doing  so, 
many  legislators  are  in  especial  need  of  reading,  learning, 
and  inwardly  digesting  it."  —  New  York  Times. 

"  No  more  authoritative  work  upon  the  currency  of  the 
United  States  ever  has  been  issued  than  that  written  by  A. 
Barton  Hepburn  .  .  .  the  book  should  be  carefully  read  by 
every  banker  or  other  persons  interested  in  finance." 

—  Boston  Herald. 


THE   MACMILLAN   COMPANY 

Publishers  64-66  Fifth  Avenue  New  York 


Day  in  Court 

BY   FRANCIS    L.    WELLMAN 

Cloth,  gilt  top,  258  pp.,  8vo,  $2.00 

This  book  will  give  to  the  general  reader  and  to  young  men  who  desire 
to  become  successful  advocates  a  practical  knowledge  of  the  art  of  great 
advocates  in  eliciting  the  truth,  indicating  the  methods  by  which  they 
charm  and  convince  both  court  and  jury  and  win  them  over  to  their  side 
of  the  controversy.  The  work  is  filled  with  the  hints  and  suggestions 
which  have  been  derived  from  the  author's  experience  of  many  years  in  the 
courts  and  with  many  concrete  examples  and  illustrative  materials. 

"An  excellent  and  most  entertaining  book."  —  New  York  Post. 
"An  excellent  book  for  young  lawyers  to  read."  —  The  Outlook. 

The  Art  of  Cross-Examination 

With    some    cross-examinations    of   impor- 
tant  witnesses    in   some   celebrated   cases. 

BY   FRANCIS    L.    WELLMAN 

Cloth,  8vo,  404.  pp.,  $2.50 

OPINIONS  OF  THE  PRESS 

"Mr.  Wellman  understands  his  subject  thoroughly,  there  can  be  no 
question.  Those  looking  to  perfect  themselves  in  the  art  of  cross-examina- 
tion can  hardly  do  better  than  to  make  a  study  of  this  book." 

—  Chicago  Tribune. 

11  It  is  not  often  that  a  book,  written  on  so  technical  a  subject  as  this 
most  subtle  branch  of  the  advocate's  art,  possesses  so  much  genuine 
interest  for  the  thinking  reader.  There  is  scarcely  a  business  man  of  good 
intelligence  anywhere,  who  would  not  find  <  The  Art  of  Cross-Examination ' 
as  fascinating  as  a  novel."  —  Brooklyn  Daily  Eagle. 


THE   MACMILLAN  COMPANY 

Publishers  64-66  Fifth  Avenue  New  York 


AN  INITIAL  RETO 

OVERDUE.  ===== 


YC  2673  P. 


358852 


UNIVERSITY  OF  CALIFORNIA  LIBRARY 


